The Paycheck Protection Program was a lifeline for many businesses during the early weeks of the COVID-19 pandemic. And while the application for forgiveness was released back in May (and revised in June), the SBA didn’t open its portal to lenders to start accepting forgiveness applications until Aug. 10. Now that the SBA portal is open, many borrowers are asking when they should apply for forgiveness.
Should I apply for forgiveness right away?
The PPP program has been in flux virtually since the day it was created. Changes continue to be made to the program, both through Congress, the SBA and the Treasury Department, including new forgiveness FAQs issued on August 4, 2020. Most of the changes have ultimately been beneficial to borrowers but there are still several outstanding questions about a number of issues, including deductibility of expenses for forgiven loans, whether additional expense types (e.g. expenses for personal protective equipment) will be deductible and whether any additional proposed changes will be implemented in a stimulus package passed by Congress. Since payments or principal and interest are deferred for 10 months in addition to the time period when an application for forgiveness is pending, there may be little downside to waiting to see if applications are simplified further or the rules becomes more beneficial.
If I apply for forgiveness, will that impact my tax burden for 2020?
The IRS issued a notice on April 30, 2020 that dramatically impacted the tax impact of the PPP. Specifically, the IRS stated that “no deduction [of payroll, mortgage interest, rent or utilities] is allowed … if the payment of the expense results in forgiveness of a [PPP] loan.” This means that regardless of Congress’s intent to give borrowers a tax-free way to maintain their payroll, borrowers will instead be taxed on the amount of their PPP loan. KJK Managing Partner Jon Pinney and Tax Group Chair Kevin O’Connor have already contacted Ohio Senators Sherrod Brown and Rob Portman to support a legislative fix to this significant problem. We also encourage all PPP borrowers to reach out to their elected officials to urge that the IRS notice be reversed. A sample letter is available for download here and you can find contact information for your representatives at Congress.gov.
Who should definitely wait to apply for forgiveness?
If you laid off employees and haven’t been able to rehire them, you should take the opportunity to cure those workforce reductions. The Paycheck Protection Flexibility Act provided that borrowers have until Dec. 31, 2020 to rehire or hire similarly qualified employees or to demonstrate that they are unable to return to prior levels of business activity due to government mandates regarding sanitation, social distancing or safety requirements for customers or workers.
What is the forgiveness process?
Borrowers are responsible for submitting SBA’s forgiveness application (or their Lender’s equivalent form) along with all supporting documentation before the maturity date of the loan. However, 10 months from the end of the “covered period” is when borrowers must start making principal and interest payments, so borrowers generally shouldn’t wait any longer than that.
Lenders then have 60 days to review the forgiveness application and make a determination as to whether they will issue a decision to the SBA, whether the forgiveness should be approved partially or in full or whether they should deny the application. SBA then has 90 days to issue its own decision. If a borrower disagrees with the lender’s decision, it can request that the SBA review the decision or exercise any other right it has against the lender under applicable law, which may include claims for breach of contract.
Are banks even accepting forgiveness applications?
It entirely depends on the bank. Some banks have been accepting forgiveness applications since July 2. Others have sold their entire PPP loan portfolio to special purpose loan servicers, and those servicers will now be making forgiveness determinations. And there are some banks that won’t be announcing their forgiveness process until late August or early September.
What should I do?
Borrowers applying for forgiveness should confer with their legal counsel and accountant to make an informed decision about the timing and tax implications of their forgiveness applications.
If you have any questions about the PPP loan forgiveness process, contact any of our PPP Response Team members, including Demetrius Robinson (firstname.lastname@example.org; 614.427.5749), Kevin O’Connor (email@example.com; 216.736.7213) and Jennifer Hart (firstname.lastname@example.org; 216.736.7208).