PPP Is Closed: What Startup Founders Should Know About Legacy Loans

The Paycheck Protection Program closed to new applications on May 31, 2021. It is not a funding option for a startup forming today. For a Delaware C-corp that received a loan, however, PPP can still matter in historical accounting, tax records, and investor or acquisition diligence.

The useful founder question is whether the company can document the loan's status and treatment. Old application guides should not be used as current financing instructions.

Understand what the program did

PPP was a pandemic-era lending program with forgiveness available to eligible borrowers that satisfied the applicable requirements. Payroll and specified nonpayroll costs were central to the rules. Eligibility, loan calculations, covered periods, and forgiveness conditions depended on the relevant program provisions.

A C-corp's employee payroll was distinct from a self-employed individual's owner-compensation calculation. Payments to independent contractors generally were not included in the borrowing employer's payroll-cost calculation. A founder should therefore avoid importing a sole proprietor's worksheet into the corporation's historical file.

Confirm the actual loan status

Locate the loan agreement, disbursement record, forgiveness application, and lender or SBA determination. An application submission is not the same as a forgiveness decision. Reconcile any unforgiven amount, repayments, and interest to lender statements and the general ledger.

If status is unclear, work with the lender and your advisers to establish it. Do not assume a loan disappeared merely because no one on the current team remembers making payments.

Keep a complete support file

• Original application and eligibility support, including relevant ownership or affiliation analysis.
• Payroll reports and other records supporting the original calculation.
• Evidence of eligible spending during the applicable covered period.
• Forgiveness application, supporting schedules, and final decision.
• Repayment records for any remaining balance.
• Accounting entries and federal and state tax treatment.

Preserve the records under the applicable retention requirements and any lender or legal guidance. Keep access available when employees or accounting providers change.

Separate federal tax treatment from book accounting

For eligible forgiveness, federal law generally excludes the forgiven PPP amount from gross income and does not deny otherwise allowable deductions merely because the expenses were funded by the forgiven loan. The IRS guidance on PPP forgiveness addresses these rules and timing.

That does not make every claimed expense deductible or every forgiveness situation eligible. State treatment and financial-statement recognition can require separate analysis. Your accountant should explain the treatment used on the corporation's historical returns and books.

Check interactions with other relief

If the company claimed employee retention credits, review wage allocations. The same wages cannot be used for both PPP forgiveness and the ERC in a way the coordination rules prohibit. See the IRS ERC guidance. Keep the allocation schedule with the support file rather than reconstructing it during diligence.

Make the diligence answer easy to verify

Prepare a short summary showing the amount borrowed, amount forgiven, remaining balance, and location of the supporting documents. Have your accounting and legal teams resolve inconsistencies before a financing or acquisition process.

For current runway planning, use financing options actually available to your company. PPP belongs in the historical records of a startup that participated, with its status and accounting clearly documented.

‍