Forgiveness – The final chapter in the PPP Loan process. While most borrowers have completed their “Covered Period” to spend the money, and might be ready to apply, many lenders are still not accepting applications. This is causing a lot of confusion about the application deadline, when to apply, tax consequences, required documentation, etc. Below, we’ve tried to answer many of these questions – to the extent we have answers.
Forgiveness Application Deadline – When Must You File?
Originally, the SBA indicated there would be an October 31, 2020 deadline. Of course, that date came and went without an ability to even submit forgiveness applications with many lenders. The current deadline for forgiveness is now 10-months after the end of your “Covered Period”. Remember, your Covered Period was originally the 8-week window after you received your loan. But, this was extended to allow an optional 24-week period.
Quick math: Most borrowers (including most of our clients) received their loans during the month of April 2020, with the earliest possible loans in the first week of April. Therefore, the earliest possible deadline for forgiveness application would be near the end of April 2021, assuming an 8-week Covered Period. Or, more likely borrowers will choose to use the 24-week Covered Period, which would put the earliest deadlines into August 2021.
Either way you slice it, borrowers have plenty of time to submit those applications. Read-on for reasons you may want to wait.
What Are The Banks Waiting For?
The SBA published the current version of the Forgiveness Application in June, and then instructed you to submit the application to your lender. But, lenders weren’t so quick to accept. Why?
The applications require you to submit necessary documentation (evidence) of your eligible expenses. The SBA has also issued guidance to banks that would imply they have some responsibility for reviewing and verifying the attached documents. But, banks certainly don’t want to be on the hook for auditing your payroll records. This is a concern for more conservative banks – who were told they wouldn’t be taking any underwriting risks associated with these loans. As a result, banks are still negotiating with the SBA to clarify these verification rules.
On the other hand, some banks (typically smaller banks) have a substantial portion of their balance sheet deployed in these PPP loans, earning them a lackluster 1% interest rate. So, many smaller banks are setting aside these possible verification risks in lieu of being repaid quicker.
This is all sending mixed signals to borrowers. Typically the larger banks still haven’t set-up their forgiveness portals and are not accepting applications. Meanwhile smaller banks might be encouraging early forgiveness applications from their borrowers.
A number of trade groups and politicians on both sides of the aisle have indicated a desire to see blanket forgiveness (or perhaps reduced documentation) for loans below a certain size. A threshold of $150,000 has been discussed, which would account for 85% of all PPP loans. As noted above, some lenders are hoping for simplified documentation rules so they can process these forgiveness applications with less time and risk. Borrowers would like that too.
The SBA did make forgiveness easier for loans below $50,000, with the Form 3508-S. This “Simple” form removes the possible headcount and salary level reductions required of larger borrowers. This is causing all PPP borrowers to remain hopeful of new rules that continue to make the application process easier for those with loans over $50,000 as well.
The CARES act clearly indicates that forgiveness of the PPP loan will be tax exempt. However, on April 30, the IRS issued Notice 2020-32 which indicates the expenses used to claim forgiveness of the PPP Loan would not be deductible. This essentially makes the PPP loan forgiveness taxable again. Maybe?
As soon as the IRS issued its opinion, many tax trade organizations and politicians indicated this wasn’t the intent of Congress to have the IRS use its own “loophole” to cause these loans to become taxable. In addition, there are a number of tax law scholars that have written position papers that do not believe the IRS’ assessment is on solid legal ground.
While we don’t yet know what the IRS forms and filing requirements will be, by deferring the forgiveness until 2021 it’s possible that the expenses in 2020 would not fall under the IRS Notice 2020-32 (as the loan would not have been forgiven). Then, if you apply for forgiveness next year, the CARES Act clearly says your debt forgiveness would be tax-free income in 2021.
Waiting to apply in 2021 for forgiveness could also buy time for Congress to step in and clarify this issue. Either way, with deadlines to apply no earlier than April of 2021, BiggsKofford’s advice to most clients is to wait until 2021 to file your forgiveness application, with some exceptions.
Hurry Up – And Wait!
First, congratulations if you’ve read this far into the article!
Now, having read all these points above you might be thinking, “I’ll just worry about this Forgiveness Application sometime next year”. But, not so fast… The further you get past your Covered Period and get out of 2020, the harder it will become to locate those payroll records and other receipts that you may need to complete the application process. Not to mention – do you really want to call your accountant on April 1st and expect they will have free time to help you with this Forgiveness Application?
Accordingly, BiggsKofford is planning to assist clients with preparation of these Forgiveness Applications during November and December, before we get into tax season. We recommend you gather all the documentation and have the application forms completed in the next couple months. Then you can just wait until next year to submit with your Lender once we have clarity on some of the issues noted above.