The Small Business Administration (SBA) and the Treasury Department continued their unrelenting release of new rules surrounding the Paycheck Protection Program (PPP) loan forgiveness on October 11 and October 15. Here’s what you need to know:

1. Timing is Everything

On October 11 they announced a streamlined forgiveness process for borrowers with loans of $50,000 or less. However, it may not be in your best interest to apply for forgiveness just yet. Congress, Treasury, and the White House are still negotiating a further extension of the PPP loan program. We do not know this for sure, but you wouldn’t want to have closed out your PPP loan when additional money might be available.

2. Updated Application Dates

On October 13, the SBA and Treasury updated the frequently asked questions surrounding forgiveness, to give further guidance concerning when you may and must apply for forgiveness: either 10 months or 2 to 5 years.

3. You May Not Have to Start Making Payments Yet

You may apply for forgiveness of your loan within 10 months following the last day of your covered period (either 8 weeks or 24 weeks) following the loan date. If you apply, then you do not need to start making payments on the loan. 

For Example, The 24 week period ends October 30, 2020. You have until August 30, 2021 to apply for forgiveness. However, that is not the deadline for actually applying for forgiveness.

4. The Importance of the Date On Your Documents

When you signed the loan documents with the bank and SBA, there was a due date on that note which is either two years or five years from loan origination. Hold that date because it is important. You may submit your forgiveness application at any time before that due date on the loan. 

Here’s the catch; if you do not apply within 10 months then you’ll need to start making payments on the loan. Nonetheless, you can delay filing the application, but if it’s later than 10 months following the end of the covered period, you will need to start making payments.

5. Certain Things You Can Ignore

The actual loan application form (3508, 3508EZ, and 3508S) displays an expiration date of 10/31/2020 in the upper right-hand corner that you can ignore. You can disregard that date because it indicates compliance with the Government Paperwork Reduction Act and will be changed from time to time as SBA updates compliance. Changes to the form itself are not expected.

So, when should you apply for forgiveness?
Wait a minute, let’s talk about taxes first.

6. The Loan is Taxable

In Notice 2020–32, the IRS has ruled that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the PPP program. So, while the PPP loan forgiveness itself is not taxable pursuant to the CARES Act, the expenses that give rise to the forgiveness are also not deductible, which effectively makes the loan taxable. Crazy.

7. IRS Has Not Specified When the Forgiveness Income Gets Reported

Given that the expenses that gave rise to the forgiveness were paid in the calendar year 2020, one could assume that those expenses are not deductible in 2020. But, what if we waited two years to apply for forgiveness? Or five years? Are those expenses not deductible in 2020 or are they not deductible in the year in which you receive forgiveness? No one knows when the forgiveness income gets reported and the IRS has not given further guidance.

8. Consider Removing Expenses At the End of the Year

A tax strategy is clearly needed. Whatever year the disallowed expenses occur, taxable income is probably going to result, a type of phantom income. For roughly 8 weeks, the PPP covered your payroll. If you had any net revenue in excess of other expenses during that period you will have a profit. The loan is typically recorded as a liability on your books, yet the expenses are still in the profit and loss statement.

When you are working through a year-end tax strategy, you need to consider removing those expenses to get a true picture of your tax profit or loss. If you have the cash to spend on equipment, you might want to delay those expenses, pay the tax, and wait to see how your fare with the Covid crisis. Preserve cash, and if all works out fine, buy the equipment next year, which may even be at a higher tax rate, increasing the benefit. Obviously, preserve cash if your business position is risky.

For many businesses who know that profitability in 2020 will be less than in future years, which would mean no further PPP funds will be available through new legislation, they can probably apply for forgiveness and report the income in the calendar year 2020.

9. Consider Applying Immediately

If your business is negotiating for a sale or merger, you may want to consider applying immediately for loan forgiveness as that loan could be a contingency holding up the sale or merger.

10. Certain Details Are Still Unknown

For all of the above reasons, most of us will wait for the next SBA, Treasury, or IRS release to give us guidance and answer some of the questions that remain unanswered.

At the End of the Day

We are monitoring all correspondence from the IRS to keep you informed. It is important to review all of your options and view the entire picture clearly when it comes to making business decisions. Keep your eye out for more news as it is released.

Holden Moss CPAs is dedicated to aiding businesses in this difficult time. We will provide you with all the tools and information necessary to succeed. If you have any questions regarding Paycheck Protection Program loan forgiveness please give us a call at (919) 556-6216. Contact us via email at admin@holdenmoss.com. We look forward to bettering your business.