Five Things Every Paycheck Protection Program Borrower Should Do After Receiving A Loan

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

As previously published in Forbes.


The Paycheck Protection Program (“PPP”) is the crown jewel of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act allocates $349 billion to the PPP loan initiative in an effort to stabilize small businesses during the COVID-19 outbreak and to allow them to retain their workforces while weathering the Coronavirus storm.  But while $349 billion is a staggering number, it is unlikely to be enough to satisfy the demand for capital.  The appropriated funds will go fast, and it is a first-come, first-served program.  Indeed, reports are already indicating that Treasury Secretary Mnuchin is seeking an additional $250 billion for the PPP loan program.

Applications for PPP loans were available for submission on April 3rd.  Processing began in earnest for small businesses and sole proprietorships this week.  The U.S. Small Business Administration (the “SBA”) is opening up applications for independent contractors and self-employed individuals starting April 10th.  The PPP gold rush is on and there is plenty of confusion and chaos to go with it.  With many PPP borrowers having received their loan proceeds, or receiving them soon, what should borrowers be doing after receiving their loan?  Here are five things that need to be on that list.

1) Ensure That The PPP Funds Are Used Only For Allowable Uses

The CARES Act requires that a PPP loan recipient certify that the funds will be used for purposes that are authorized under the act.  In the rush to claim PPP funds, recipients should not lose sight of the legal restrictions on the use of those funds.

Indeed, the SBA issued an Interim Final Rule on April 2, 2020 that requires PPP applicants to certify that “[t]he funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.”  And that requirement comes with a warning: knowingly using the funds for unauthorized purposes may lead to charges of fraud.  In fact, there are a host of potential federal crimes that could apply for misusing funds or making false statements about the intended use of the funds.

There are other considerations as well.  If a PPP loan is used for unauthorized purposes, the loan can be converted into a recourse liability.  That is, the SBA may be able to come after the loan recipient or its shareholders, members, or partners for an unpaid loan if they use the PPP funds for unauthorized purposes.  In addition, the recipient will not qualify for the loan forgiveness provisions.

2) Work Closely With Tax Professionals To Maximize The Forgivable Amount

The full PPP loan balance may be forgiven if the loan proceeds are used for a discrete group of costs during the 8-week period following the loan.  Loan recipients need to work closely with their tax professionals to ensure that they maximize the forgivable amount of the loan.  This requires properly documenting the use and allocation of the funds.  As part of this effort, borrowers may want to segregate the funds and take steps to ensure that proper accounting mechanisms are in place.

The PPP loan can be forgiven to the extent that it is used on the following categories of costs during the 8-week period:

Borrowers need to stay abreast of the Department of Treasury (“Treasury”) and SBA guidance on these issues.  For example, the SBA, in its April 2, 2020 Interim Rule, announced that no more than 25% of the loan forgiveness amount can be attributable to non-payroll costs.  While that requirement does not appear on the face of the CARES Act itself, the SBA and Treasury imposed this requirement to align the finite resources available to fund the PPP loan program with the overriding Congressional intent to keep workers paid and employed.  Borrowers will need to work closely with their tax professionals to ensure that they are both spending the funds on the proper categories and—just as importantly—that they are able to document and demonstrate this in the future, especially if the PPP funds are commingled with other operating funds.

In addition, borrowers need to ensure that they do not run afoul of any of the CARES Act’s limitation provisions that scale back PPP loan forgiveness.  This includes ensuring that they do not unnecessarily trigger the limitations based on reductions in employee count or reductions in an employee’s salary or wages.  Borrowers may be able to avoid these limitations through careful planning.  Borrowers may also be able to course correct for pre-loan layoffs or furloughs in order to avoid reduced eligibility for the forgiveness provisions.  Again, this may require careful and quick planning.

3) Maintain Proper Documentation To Substantiate Costs

Document, document, document.  Did I mention, document?  Borrowers need to maintain documentation of the use of their PPP funds.  The CARES Act expressly requires that the borrower be able to adequately document the use of the funds in order to obtain forgiveness.

Borrowers will ultimately be required to submit a request for loan forgiveness to the lender that is servicing the loan.  The request will need to include a number of items, such as documentation to verify the number of full-time employees and their pay rates, as well as documentation to prove expenditures on eligible mortgages, leases, and utility obligations.  This documentation may include cancelled checks, payment receipts, transcripts of accounts, and other documentation.  If history teaches anything, it is that regulators tend to give more focus to the documentation requirements once the smoke has cleared and the underlying emergency has subsided.  Borrowers should not overlook the need to document and substantiate.  Maintain copies of those payroll records, invoices, and utility bills.

4)  Look For Additional Tax Savings Under The CARES Act 

In the rush to get their foot in the door for PPP loans, many borrowers have not yet had a chance to consider whether they may qualify for other tax breaks under the CARES Act.  Borrowers need to take the time to consider how those potential tax breaks might augment their PPP loans.  Or better yet, borrowers should consult with a tax professional to ensure that they maximize the tax relief available under the Act.

The CARES Act provides businesses with a number of potential tax breaks.  For example, the CARES Act retroactively amended the Tax Cuts & Jobs Act of 2017 (“TCJA”) to remove some not-so-helpful restrictions.  The CARES Act specifically increased the ability to deduct net operating losses—often referred to as “NOLs.”  Under the TCJA, NOLs related to 2018 and later years generally could not be carried back to prior years.  The CARES Act changed that.  It allows taxpayers to carry back NOLs from 2018, 2019 and 2020 to the prior five years.  The idea is to allow taxpayers to file amended returns and get cash refunds now—when they need it most.

The CARES Act also did away with restrictions that applied to non-corporate taxpayers on something known as excess-loss deductions.  Taxpayers that suffered serious losses in 2018 or 2019 may have unused excess losses.  Thanks to the CARES Act, they will now be able to use those losses more quickly.

The CARES Act loosened the rules that limit business interest deduction.  The Act basically allows some taxpayers to deduct additional business interest expenses.  Under the TCJA, some taxpayers were only able to deduct business interest expenses up to a limit that was calculated by summing (i) business interest income, (ii) 30% of “adjusted taxable income” (essentially EBIDTA for tax years beginning before 2022), and (iii) “floor plan financing interest.” The CARES Act increases the 30% limitation to 50% for tax years beginning in 2019 and 2020.  Increased interest expenses may cut down on a business’s tax bill and may even create a NOL.  That may be particularly helpful because NOLs can now be carried back to pre-TCJA tax years and used to offset income that was subject to a higher tax rate.

Finally, the CARES Act accelerates the ability for corporations to use alternative minimum tax (AMT) credits.  Under the new provisions, companies are able to claim AMT credits for as early as the 2018 tax year.  This provides yet another mechanism to get cash quickly during the COVID-19 epidemic.

5)  File an Application With The Bank After the 8-Week Period To Request Forgiveness Of Loan Amounts  

Finally, PPP borrowers will need to file an application with their bank after the 8-week period.  By that time, if they have been following the guidance above, that should be a relatively easy process.  Banks are required to make the forgiveness determination within a 60-day period after the application is submitted.

Keep in mind that a representative of the business will be required to submit a certification providing, among other things, that the amount for which forgiveness is requested was used for appropriate purposes.

And, just to end on a high note, do not forget: Loans that are forgiven under the PPP are not subject to federal taxation as discharge-of-indebtedness income.  The CARES Act specifically excludes them from gross income.


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