There is no question that PPP loan borrowers who wish to apply for forgiveness and release the burden of their PPP loan are eager to move forward. Uncertainty, however, remains.
Although there is much talk about automatic forgiveness for PPP loans under a certain dollar amount, several rounds of stimulus legislation containing PPP modifications have failed in Congress. Proposals are still being made and discussed, including the most recent round of coronavirus stimulus legislation which passed in the House. It is still not clear, however, what changes will be made, if any, and when.
Meanwhile, earlier this week, the Treasury Department announced it will begin forgiving PPP loans granted to small-business owners. Applications are generally expected to be approved quickly, with the exception of loans above $2 million that will get added scrutiny.
So what should PPP loan Recipients be Doing Now?
Just because banks are now accepting applications and the Treasury is starting to approve them, does that mean you should race to apply?
The process will vary slightly from bank to bank, and like all elements of the PPP program, the rules may change. In general, if you are eligible and can get your funds forgiven now, you may want to get started. At a minimum, if you haven’t done so already, start to work on the application and gather required documentation.
But, on the other hand, with so much up in the air, it may be more advantageous to wait until Congress finalizes the forgiveness rules.
Two main issues remain with PPP forgiveness:
Blanket forgiveness: Most PPP loans were for $150,000 or less. Because the PPP loan forgiveness process can be tedious, complicated and potentially expensive, members of Congress have proposed legislation that would allow for a much simpler process of streamlined forgiveness for loans under a certain amount. The commonly discussed threshold is loans of $150,000 and below, but that could change, and there’s a possibility that blanket forgiveness won’t ever be granted.
Deductibility of expenses: Forgiven PPP loans are not taxable income, but IRS Notice 2020-32 declared that no tax deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP-covered loan. The position is that allowing the deductibility of expenses paid with PPP funds would result in a double-dipping scenario.
According to The Journal of Accountancy, the AICPA is among hundreds of organizations that that have urged Congress to allow full deductions for PPP-related business expenses. Given the severity of the pandemic’s impact on U.S. businesses, the AICPA believes Congress intended PPP expenses to be deductible. Lawmakers from both parties have voiced support for this position, but that has not yet translated into congressional action.
How to apply:
Forgiveness application due date:
There is no defined deadline for borrowers submitting the forgiveness application, but borrower payments will be required 10 months after the end of the covered period as explained in FAQ No. 3 of the PPP Loan Forgiveness FAQs.
Borrower submission of a forgiveness application does trigger deadlines for lenders and the SBA. Section 2(a) of the Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures 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.
Early applications for loan forgiveness:
The PPP Flexibility Act, P.L. 116-142, signed into law June 5 extended the covered period from eight weeks to 24 weeks. Whether it’s eight or 24 weeks, borrowers may apply for forgiveness before the end of the covered period, once all PPP monies are spent. But doing so lowers the maximum eligible compensation. Additionally, any salary or wage reduction would be extrapolated to the full covered period. If you plan to apply earlier, check your forgiveness calculations carefully to make sure you do not need the extra time to achieve the maximum amount of forgiveness possible in your situation.
NOTE: The AICPA has a loan forgiveness calculator (updated as of current guidance September 16, 2020) that will make it easier for you to run different timeline and expense scenarios and is a good tool to assist in preparing your application.
Types of Forgiveness applications
The EZ version applies to borrowers that:
- Are self-employed and have no employees; OR
- Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; OR
- Experienced reductions in business activity as a result of health directives related to COVID—19 and did not reduce the salaries or wages of their employees by more than 25%.
The application requires fewer calculations and less documentation for eligible borrowers. You can determine if you are able to use the EZ application by reviewing the Checklist for Using SBA Form 3508EZ (PDF) on the SBA’s website.
The longer version of the application has the adjustments for Full-Time Equivalency (FTE) and Salary/Hourly Wage Reductions.
Make sure to take your time and get your documents together before you start that process.
Required Documentation
Some of the substantiation you may need includes:
Payroll:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period: Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
Nonpayroll:
(For obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.)
- Business mortgage interest payments: You’ll need a copy of the lender amortization schedule and receipts or cancelled checks that verify eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
- Business rent or lease payments: You’ll have to provide either a copy of your current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
- Business utility payments: Gather all the invoices you’ve paid since February 2020 through the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
Use your best judgment:
Be aware of the guidance, read the application and application instructions thoroughly, run your forgiveness numbers and use that information to come to a reasonable conclusion regarding when it is most advantageous to apply for forgiveness.
W&D is available to help you with the PPP forgiveness process. From keeping you informed of the latest legislation developments to answering PPP forgiveness related questions, or to full engagements to assist you in preparing your PPP loan forgiveness application, please do not hesitate to reach out. Contact your Warady & Davis advisor or our PPP team at 847-267-9600; info@waradydavis.com.
You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more. This information is updated regularly.