If getting a PPP loan approved meant you had to move at warp speed, getting one forgiven may well feel like you’re stuck in slow motion. Let’s take a look at what’s been going on in the forgiveness process, how the current and potential legislatures could impact forgiveness and taxes, and tips from lenders that would help you sail through that forgiveness process without a hitch!
How many businesses have applied for forgiveness already?
Since launching an online portal for loan forgiveness in early August, the SBA has received more than 96,000 applications from businesses seeking to have their loans forgiven but none had been approved. These applications represent about 2% of the 5.2 million loans, worth $525 billion, according to data from the SBA. It also could take the SBA as long as 90 days before the agency needs to remit anything to the lender. And the lender, filing the forgiveness application on behalf of the borrower, has 60 days before it needs to submit anything to the SBA. The good news is that a Treasury Department spokesperson said that the processing of the forgiveness applications is anticipated to begin this week.
What’s going on in the legislature?
Lawmakers in the House and the Senate have introduced legislation to streamline forgiveness for PPP loans less than $150,000, granting blanket forgiveness to businesses with a simple attestation that the funds were used in accordance with guidelines. Banks and small business advocacy groups are pushing the legislation, over concerns that the process is too complicated for small businesses.
In addition, Congress also is considering an additional round of PPP funding for hardest hit businesses. Businesses that have already used up their PPP funding might get a second chance for money from the program.
How does the PPP loan forgiveness impact taxes?
Under the program, any loan forgiveness would be excluded from the borrower’s taxable income. The Internal Revenue Service published IRS Notice 2020-32, denying a borrower’s ability to deduct the same expenses that qualify for the loan forgiveness. Since Congress intended for the loan forgiveness under the program to be tax-free, this IRS Notice reverses that position and eliminates any benefit intended from the program. The American Institute of Certified Public Accountants and other industry groups have written a letter to Congress to urge Congress to reverse the IRS Notice because it goes against the intention of the CARES Act. Congress is currently addressing this issue.
Tips from Banks on Applying for Forgiveness
- Since the forgiveness application opened up in early August, many banks have implemented technology solutions to assist businesses to manage their forgiveness applications. Banks have been taking their time getting set up to avoid being crushed by applications, as they were during the initial launch of the program. They want to make sure all the IT bugs are worked out.
- If your bank provides a spreadsheet template to help you track the PPP loan disbursements, it is important to review the results of the spreadsheet to make sure that it reflects the intended forgiveness of the loan. Banks strongly advise businesses to engage a CPA to review the calculation as often times spreadsheets have limitations and do not address all nuances of the PPP loan legislations.
- The biggest hurdles so far appear to be the supporting documentations that are required to be submitted to the banks for forgiveness. Some businesses are not submitting the correct documents (especially if a business used the loan proceeds to pay certain non-payroll costs, e.g. utilities, interest, rent, etc.), or not reconciling the differences amount various documents for the same period. Banks strongly recommend that businesses engage a CPA to assist with gathering the documents and reconciling these differences.
- Businesses should ensure that salary for owner employee is calculated correctly in the forgiveness application. The latest interim final rules define owner employee as having at least a 5% ownership in a business. This is important because the salary for an owner employee is limited to an annual amount of $100,000 for purposes of forgiveness. Any salary paid in excess of the $100,000 annual amount is not forgivable. This threshold applies in aggregate across multiple businesses owned by that same owner employee, i.e. the multiple businesses have a combined limitation of $100,000 annual salary. However, each business has the freedom to allocate this threshold among the multiple businesses.
- The most recent rules also relaxed the requirement on how the loan proceeds should be spent. Previously, 75% of the loan proceeds must be spent on payroll related costs and the remaining 25% spent on other eligible non-payroll costs in order to achieve full forgiveness. Now, a 60/40 split will achieve the same result.
At CFO Connections, we stay on top of the PPP loan forgiveness requirements and any current developments that may affect businesses on achieving maximum forgiveness. We are familiar with the technology platforms and the documentations needed as part of the application process. We can help you with presenting and reconciling the disbursements and gathering the documents so that you can focus on serving your customers. Please Contact Us.