The best advice for PPP Loan Forgiveness (at least at press time) continues to be, “wait for it, wait for it.” Until there is more clear direction, as difficult as it is, consider holding off applying for forgiveness.
If your company received a Paycheck Protection Program loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act there is naturally concern over maximizing loan forgiveness. There continues to be uncertainty over some of the program details. While there is anxiety about applying for forgiveness, here are the factors affecting the application process and why waiting may make sense.
PPP loan forgiveness requires borrowers to submit applications for forgiveness to the lending institution that funded their PPP loan. That lender must review the application and supporting details, ultimately making a decision as to the forgiveness they believe is supported by the application. The lender then must submit the application package and their recommendation to the Small Business Administration for review and a final forgiveness decision.
Although a few lending institutions have opened up their portals to accept borrower applications, many have not.
PPP loan recipients are well beyond the original eight-week covered period for spending the loan proceeds on eligible costs. The program was amended replacing the now-optional eight weeks with a default 24-week covered period. Many borrowers have already spent their funds and would like to get the forgiveness confirmed.
From a borrower’s cash flow perspective, no payments will need to be made on PPP loans until a final SBA forgiveness decision is made on a forgiveness application or, if that forgiveness application is never filed, 10 months following the end of the 24-week covered period.
Stated differently, if a borrower files for forgiveness sooner rather than later, payments for unforgiven balances and related accrued interest will be due shortly after the SBA forgiveness decision is received. So logically, if you want to delay the cash outflows to repay the loan, wait and file for forgiveness closer to that 10-month mark.
As to developments involving the calculations for PPP loan forgiveness, in August, the SBA released additional guidance on forgiveness-related questions. Many questions remain, but ultimately, expect that some gray areas may be left to the individual lenders to decide – adding more complexity to navigating the forgiveness process.
Additionally, on Oct. 8, the SBA released a “streamlined” application for PPP Loans of $50,000 or less. As you can see, the landscape is ever-changing. We remain hopeful that some level of automatic forgiveness for smaller loans and a possible second PPP loan program will be passed by Congress.
The SBA Giveth and the IRS Taketh Away
For federal purposes, PPP loan forgiveness may be excluded from gross income by an eligible recipient. However, the IRS issued Notice 2020-32 in April 2020 stating that expenses associated with the tax-free income are nondeductible. This guidance was consistent with historic IRS guidance regarding nontaxable income and related expenses but has the net effect of essentially reversing the tax-free benefit of the exclusion on the loan forgiveness.
While the IRS guidance doesn’t appear to align with Congress’s expressed intention, there hasn’t yet been a law to rectify it despite discussion in Congress about fixing it. Based on current guidance, we know that expenses associated with forgiveness are nondeductible.
We recommend that all borrowers assemble their information in sufficient detail for the application process. For those with smaller loans, it makes sense to wait and see what the automatic forgiveness cap will be, if any. These smaller borrowers will likely still need to submit some reduced level of detail with their forgiveness application, and will be obligated to maintain documentation on eligible costs. Now would be a good time to evaluate the several options to determine what will provide the greatest forgiveness. Variables such as the 8 vs. 24 week covered periods in combination with actual and expected workforce changes can impact when forgiveness is maximized. Forgiveness is valuable – so planning is essential. And this planning analysis will ease the uncertainty about what forgiveness the borrower can expect, or what actions should be taken in the last few weeks to improve the forgiveness conclusion.
Ursula Scroggs is managing director at Troy, Mich. based DKSS CPAs + Advisors. Jean Stenger is a CPA and senior accounting manager for DKSS CPAs + Advisors.