Forgive and Forget? – Many PPP loan recipients still searching for answers

by Joseph Mastriani

The Paycheck Protection Program or PPP has been a lifeline for many small businesses that have been crippled by the coronavirus.  Much of the credit for the recent economic recovery has been attributed to the $2.2 trillion CARES Act stimulus package that Congress passed back on March 27th.  One aspect of this bill was the creation of the PPP loan forgiveness program.

And while the intent of the PPP was to create simplicity and security in uncertain times, an unintended effect of the statute and forgiveness application has been to complicate borrowers’ business planning and create further questions.  Three related issues on the minds of small business owners are highlighted below. 

Non-deductibility of forgiven expenses 

According to a recent IRS revenue ruling, businesses that “reasonably believe” their loan will be forgiven in the future may not deduct those costs – whether they have filed for forgiveness or not.  In the case where a PPP loan was expected to be forgiven in full or in part, and it is not, businesses will be able to deduct those expenses not forgiven. 

Leaders of the tax-writing Senate Finance Committee, Iowa Republican Chuck Grassley and Oregon Democrat Ron Wyden said the ruling by the IRS and Treasury “increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle, and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”

“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” the senators said in a statement.  

Grassley and Wyden asked the IRS and Treasury to reconsider their position and said Congress might act before they adjourn for the holidays.  As of this writing, no progress has been made on this front. 

With Congress poised to pass further stimulus legislation soon, there’s a very strong likelihood that any such bill passed will include a provision to allow for the deductibility of forgiven PPP covered expenses either before the end of this year or in early 2021.

Simplified loan forgiveness application

One positive outcome for certain borrowers, recently, was the release of a streamlined loan forgiveness application for loan amounts of $50,000 or less.  While the SBA makes clear that filing this simplified form will not provide automatic loan forgiveness, a borrower is no longer required to reduce the amount eligible for forgiveness if the borrower:

Reduces the salary or hourly wage of an employee (who earned less than $100,000 in 2019) during the “covered period” following the borrowing relative to the first quarter of 2020, or

Reduces full-time equivalent employees (FTEs) during the covered period relative to a base period.

Borrowers must still compute the amount eligible for forgiveness and will have to make some certifications and provide documentation to the lender for payroll and nonpayroll costs but would not be required to furnish detailed calculations.

Timing of loan forgiveness application

The SBA explains that borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from the loan’s origination, depending on the borrower’s agreement. But the SBA also reminds borrowers that loan payments are deferred only until 10 months after the last day of each borrower’s loan forgiveness covered period.  For example, the SBA wrote, a borrower with a covered period that ends Oct. 30, 2020, has until Aug. 30, 2021, to apply for forgiveness before loan repayment begins. 

More and more, professional advisors are recommending for borrowers to take a wait and see approach to applying for loan forgiveness based on the constantly evolving guidance from the SBA and Treasury.  In addition, the potential for further streamlined applications for loans of $150,000 and less exists as well as a tiered simplification process for higher loan amounts.  

In conclusion, restaurants, retailers, and other mom and pop businesses that have been among the hardest hit, face critical questions about whether they can survive through what will likely be several more months of Covid-19 operating restrictions.  Avoiding unnecessary debt and tax obligations should be the least of these owner’s worries.

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