It has been a while since you last heard from us, we hope everyone is staying safe and doing well in this crazy year of 2020. Not sure anyone could have written a movie script for this year. We wanted to provide a quick PpP update to clients since the banks are pushing for you to submit forgiveness applications. We want to make it clear; they are NOT due right away. In 99% of the cases, we will be using the 24-week covered period (the starting line was the day your loan was funded), this should allow payroll costs to cover most of the loan proceeds and allow a somewhat easier application. On October 7th the Treasury & SBA issued a new forgiveness application for loans under $50,000, form 3508S. This requires certifications from the borrower, along with some documentation, but does NOT require any employee level calculations. Loans over $50,000 will submit form 3508EZ (if you are one of the following – 1. Had no employees OR 2. Did not reduce wages of any employee by more than 25% during the covered period AND did not reduce the size of the your workforce during the covered period OR 3. Did not reduce wages of any employee by more than 25% during the covered period AND the business was unable to operate during the covered period at the same level of activity due to compliance with governmental requirements due to COVID-19. Having fun yet? We believe this should cover a vast majority of loans. With the 3508EZ application there are certifications and we must submit documentation with this application, but still believe it will be a fairly simple application process. If neither 3508S or 3508EZ applies, we will need to submit the long form 3508. This is a different animal and will be a very in-depth application process.
How long do you have to submit your application and how long is the deferral of payments & interest? The answer: 10 months from the END of your covered period (most will be 24-weeks from loan funding). Example, loan was funded April 27, 2020, 24-weeks ends October 12, 2020, your additional deferral (this is automatic) is until August 2021. No payments are due during this period. If you submit forgiveness application by the end of the deferral period and your loan is fully forgiven, nothing is due, including accrued interest. If for some reason the loan is not fully forgiven there may be interest (1% annual rate) charged from date loan was funded. For a vast majority of our client loans, we expect full forgiveness. There is no rush to get this done, contrary to what you may be hearing. Now, onto the reason we do NOT want clients applying for forgiveness right away…
When the CARES Act was passed it was clear in the legislative text the forgivable portion of the PpP loan was NOT to be considered taxable income. On April 30, 2020 the IRS released notice 2020-32, which in essence reverses what was passed in the CARES Act by stating any expenses paid with a loan that is forgiven are NOT deductible. What this really means is if your loan is forgiven it will be considered taxable income. There is a bill in the House that has bipartisan support that reverses what the IRS did and goes back to what the intent of Congress in the CARES Act was. However, like a lot of what is going on these days, we don’t know if or when this will pass. Therefore, we prefer to hold off until this issue is put to rest and we know exactly how to proceed. Bottom line is if your loan is not forgiven until 2021, we can possibly kick the tax consequences of this down the road for another year because until it is forgiven, we feel it is a loan and should be treated like every other loan.
They continue to make changes to this program, as evidenced by release of a new application for loans under $50K just last week. We expect further changes and possibly more PpP funds to be released for certain qualified businesses. Our recommendation is that you wait on your forgiveness applications until we have CLEAR guidance on how to proceed with both the SBA and the deductibility issue.
As always, we appreciate your faith in our Firm and the guidance we provide. We know it has been a while since we sent an update, but with the ever-changing rules we hesitated causing additional confusion. With the 24-week period ending for most and the banks sending out applications, we felt it was prudent to give an update and clarify our position. Thanks again for your patience during this process and we hope everyone and their families stay safe during the coming Fall and holiday season.