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(Last Updated 10/19/2020)
It's hard to believe that the CARES Act, which gave rise to the Paycheck Protection Program, was signed over 6 months ago! Following the CARES Act, the Paycheck Protection Program Flexibility Act gave us some additional guidelines and, well, flexibility. One of the big things that came out of the Flexibility Act was increasing the covered period from 8 weeks to the earlier of 24 weeks or December 31, 2020. This gave businesses more time to incur eligible costs that could be forgiven. This was especially important as many businesses were forced to close during part of the original 8 week covered period. For businesses that received PPP funding in April, we are now coming up on the end of that 24 week covered period. What to do now? If you received PPP funding, you may be considering applying for loan forgiveness. Below are some items to consider.
First, the Treasury recently released an interim final rule simplifying the application process for those borrowers with loans of $50,000 or less. Under the IFR, these borrowers won't have their forgiveness reduced based on reductions in full-time equivalent (FTE) employees or for reduction in employee salary or wages. A new form, SBA Form 3508S, was released to help make this a more streamlined process. This isn't the automatic forgiveness that we've been hoping for but it's close for a majority of borrowers. This new streamlined process will make the forgiveness process much easier for small businesses, lenders, and accountants.
Secondly, when is the application for forgiveness due? Per Q&A No. 4, the borrower may submit an application any time before the maturity of the date of the loan (two or five years from the loan origination - check your agreement). Keep in mind, however, that loan payments are deferred only until 10 months after the last day of each borrower's loan forgiveness covered period. For example, if your covered period ends October 30, 2020 then you have until August 30, 2021 to apply for forgiveness before the loan repayments begin.
Thirdly, the process will ultimately be up to the bank/lender. If you're considering applying for forgiveness, you'll need to work directly with your lender to understand their process and if they are even accepting applications; some are holding off for further guidance from the SBA, Treasury, and/or crossing their fingers for additional legislation.
A major consideration in favor of applying for forgiveness sooner rather than later is if you or the business need the loan off of your books, perhaps to meet other loan covenant restrictions or for regulatory reasons.
A few points to consider in favor of waiting on applying for forgiveness are as follows. Legislation continues to be proposed to streamline the process for higher loan amounts, $150,000 has been thrown around. Additionally, guidance continues to come out of SBA and Treasury and it's expected more will come. As mentioned above, your lender may not yet be ready to begin accepting applications. This program was practically created out of thin air. Do you want to be the first one through the system?
Perhaps the biggest question mark that remains is the deductibility of expenses related to PPP. IRS issued Notice 2020-32 back in April that officially clarified that no deduction is allowed for expenses associated with PPP loan forgiveness. This could result in some unexpected tax consequences. The AICPA and others have argued that this is counter to the intention of the CARES Act in an official letter addressed to House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell. It's possible that Congress could overrule the Treasury and issue clarifying legislation.
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