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PPP ( Promises, Promises, Promises?) Loan Forgiveness

As of December 3, 2020

According to the SBA, "The Paycheck Protection Program (PPP)  is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses."  

Uncertainty

The PPP loan was intended by Congress to be forgivable and tax free to the recipient.  But that is not how the IRS sees it. The IRS has recently announced that eligible expenses used to qualify for PPP loan forgiveness will not be deductible for income tax purposes, effectively making forgiveness of the loan a taxable event. 

That makes tax planning for 2020 and financial statement reporting of PPP loans unclear for borrowers.

There is no need to rush to complete forgiveness applications by the end of this year as we await further regulatory clarification. 

Timing of Loan Repayments 

Borrowers have 10 months from the last day of their “covered period” to apply for forgiveness.  If you do not apply for forgiveness by that time, loan payments will be required by the lender.  SBA has said that it is the responsibility of the lender to notify borrowers of payments due, but if you don’t intend to apply for forgiveness, then it would be a good idea to contact your lender for details.

Once you apply for forgiveness (within the 10 month window after the end of your covered period), your bank has 60 days to send a decision to SBA, and SBA has 90 days to review and process the forgiveness.  If any amount of forgiveness is denied, the lender will notify the borrower to set up a repayment schedule.

Example

PPP loan was received on March 31, 2020

  • The 24 week covered period runs through September 15.
  • 10 months from that date is July 15, 2021, which would be the last day to apply for forgiveness. 
  • The lender then has 60 days, until Sept 13, 2021, to submit their decision to the SBA. 
  • The SBA has 90 days, until Dec 12, 2021, to review and approve or deny forgiveness.  If any amount of forgiveness is denied, only then will the borrower be required to begin repayment.

NOTE: The extended covered period and other modifications to the program have made it easier to qualify for complete forgiveness.  But even if you don’t expect forgiveness, the interest rate on this loan is 1%,  and submitting an application for forgiveness can extend your loan deferral period beyond 10 months.

Which form do I file? 

We now have 3 forms available for forgiveness applications. The correct form depends on the amount of the loan and certain other conditions. 

Less than $50,000 loan

  • If the loan was less than $50,000,  file form 3508S 
  • Instructions for form 3508S (as of 11/30/2020) are available here. 

Certification Exception

You may be able to file form 3508EZ if you can certify that: 

  • You used the loan proceeds for approved purposes, at least of 60% of those were for payroll
  • And
    • You did not reduce the number of employees or average hours during the covered period
      OR
    • Can show that you were unable to operate at pre-COVID levels.  

Long Form

3508 is the “long form,” which requires the most involved calculations.