Many small businesses and nonprofits with Paycheck Protection Program (PPP) loans are asking us questions about the next steps on forgiveness. The banking industry is advocating for loans under a certain dollar amount to be forgiven automatically to reduce the burden of application review on lenders. However, Congress will need to pass a law to that effect.
Generally, we are hearing that loans less than $150,000 may be automatically forgiven, which means that small businesses and nonprofits with these small loans could wait a bit longer before spending time on payroll documentation and calculations to complete the SBA’s PPP forgiveness application. If your loan is relatively simple and you qualify for the EZ Form, then we advise talking to your lender as to the timing of your forgiveness application. You may have no reason to wait on your forgiveness application, especially as the six-month deadline to start repayment approaches.
Keep in mind that the SBA issued a new Interim Final Rule in early October for PPP borrowers with loans of $50,000 or less. PPP loan borrowers of $50,000 or less are now exempted from any reductions in forgiveness based on reductions in FTEs or reductions in employee salary or wages. These borrowers must use Form 3508S, which provides a simpler review process for lenders to expedite forgiveness applications, to qualify for this exemption.
Based on the information we know now, it does not appear that loans above $150,000 will be automatically forgiven. If you are in this group, you may have other concerns about loan forgiveness regarding FTE Rules or the deductibility of expenses reported on your PPP loan application. Based on our knowledge to date, here are the facts.
FTE Rule Exemptions and Forgiveness Application Timeline
If your business has been limited by rules that don’t allow you to operate at normal full capacity, you may be exempt from PPP loan forgiveness rules regarding maintaining full-time equivalent staff and salaries. However, if during the forgiveness period those restrictions go away, your exempt status may also go away.
Therefore, if your business is in a position where it’s starting to look like your locality is going to eliminate the restrictions on your business, then you may want to go ahead and get your forgiveness application filed to maintain your exempt status during forgiveness review.
The SBA released guidance on October 13 confirming 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, which can be designated as either 8 weeks or 24 weeks.
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.
Borrower submission of a forgiveness application does trigger deadlines for lenders and the SBA. The SBA gives lenders 60 days after the forgiveness application is received to issue a decision to the SBA. The SBA then has 90 days after receiving the decision from the lender to review the application and remit the forgiveness amount to the lender with any interest accrued through the date of the payment.
PPP Loan Expense Deductibility
Another area of loan forgiveness that may require Congressional action is the IRS interpretation of the deductibility of reported PPP loan expenses for 2020 tax returns. We believe the intent of Congress is that recipients of PPP loans do not have to pick up the loan proceeds as income. However, the IRS is reading the rules to say that a forgiven PPP loan negates any reported payroll, utilities, rent, interest or other expenses (as part of that loan application) as deductible for the tax year in which they occurred. If a business waits until January to file for loan forgiveness, there also isn’t clarity as to which tax year the non-deductibility of expenses must be applied.
This is the same effect as saying that the PPP loan proceeds are taxable, but changing this interpretation requires a new Congressional rule. So far, we have not seen action on this issue at the federal level, but will continue to monitor it.
Buying or Selling a Business?
We also want to caution business owners who anticipate buying or selling a business that has received a PPP loan. If a business owner is contemplating the sale of a business, the PPP loan forgiveness application should be filed immediately. New SBA rules require that a business that is being sold escrow funds equal to the amount of any outstanding PPP loans as a condition of the sale. These rules apply to any transfer of more than 50% of the fair market value of a business’s assets or a transfer of ownership of 50% or more of the business. The escrow will only be released once the entire loan balance is either forgiven or paid.
In cases where a business sale has a substantial immediate cash payment, the escrow requirement might be a minor annoyance. However, for transactions that don’t generate a substantial up-front cash payment, the rules can make it impossible to close the transaction. In either case, the loan forgiveness application should be filed as soon as possible to get the loan forgiveness process underway.
All of these factors could be more manageable if Congress takes action on the above forgiveness process and taxability factors of PPP loans. If you require further clarification or need assistance with loan forgiveness calculations, please contact us with specific questions about your PPP loan and tax planning.