As Robert Browning once put it.
“It’s GOOD to forgive. BEST to forget”
That’s why in this post, I want to help you forget and forgive your PPP loan.
Now there are some interesting developments going on right now related to PPP.
For starters, lawmakers have spent the last few months fighting over the next round of relief, including another round of PPP, which has some accountants recommending to their clients that they should hold off on applying for PPP loan forgiveness.
Now obviously debt can be especially overwhelming for any person or small business. And most of us, want to get rid of that as soon as possible so that we can make good decisions about our financial future.
But there are some convincing arguments about why you should be a little bit patient and wait.
So today, I’m gonna go over some things that you need to know before you apply for PPP loan forgiveness
In this post, we’re going to take a close look at PPP loan forgiveness.
Now if you’re reading this, chances are that you know where the PPP loan is. But for the 1% of small businesses who have not taken advantage of the PPP loan then let me quickly review what it is.
What is a PPP Loan?
The CARES act which was passed in March 2020 established the Paycheck Protection Program for small businesses.
The primary goal of this program was to provide loans to small businesses, so they could keep their payroll and people on their staff during an economic shutdown.
What was so attractive about this program was the fact that you can get your loan 100% forgiven if you met certain requirements, which essentially means that your loan could be converted into a grant.
Fast forward to today, which is November 2020, the time for that forgiveness to happen is here for many and rapidly approaching for others.
Yet there is still confusion for many small businesses about how the PPP loan will affect their future.
It’s likely you won’t know if your loan is forgiven and by how much until 2021, which will have some serious implications for your tax planning and financial reporting.
So we’re going to look at a couple big considerations.
PPP Loan Considerations to Keep in Mind
1. Tax Deductibility
Let’s discuss the biggest issue for small businesses and tax professionals which is tax deductibility.
So according to the IRS (which speaks for your federal taxes), forgiveness of the PPP loan is tax free, which means it may be excluded from gross income.
And also, based on the current guidance, we know that expenses associated with forgiveness are not deductible. So basically that means that you cannot write off your payroll expenses, rent, or any other qualified expenses that you used the PPP loan to pay for.
So logically this makes sense, right?
For example, if you usually made $100 in income and your payroll expenses are $60 then your profit will be $40.
But if during the economy shutting down your business income went down to zero dollars, you could get a PPP loan to cover your payroll expenses at $60.
|Prior Revenue||$100||Economic Shutdown Revenue||$0|
|Prior Payroll Expenses||$60||Current Payroll Expenses||$60|
So then the PPP loan would not give you any extra income or any extra losses. Sounds good, right?
And you can see how most people thought this was well-planned but here’s the technical problem.
Take a look at the timeline of PPP Forgiveness.
The borrower has a 8 or 24 week covered period for the use of the loan. After that cover period, you can apply for PPP forgiveness up to 10 months from the end of the covered period.
Once you apply, it can take 60 days for the forgiveness decision to be made.
After that, the SBA remits payment to the lender and your loan is forgiven.
The problem starts in between when you apply and when a decision is made.
Because it takes 60 days to know if your loan is forgiven or not, then you are not sure what you should deduct in 2020 or 2021.
For example, if you file your 2020 tax return BEFORE forgiveness is determined:
A. Should you deduct the expenses related to the use of the PPP funds?
B. Or do you not take the deduction, and assume (with your fingers crossed) the loan will ultimately be forgiven?
What if your loan is not forgiven and you don’t take the deductions in the correct tax year.
At this point, nobody really knows the answers to these questions.
But some people are expecting that Congress will create a solution that makes sense.
Both sides of the aisle have pushed for deductibility.
Senator Chuck Grassley and Ron Wyden wrote a letter and proposed a bill that will permit small businesses to deduct those covered costs, which would quickly put an end into this technical problem.
In their letter they said, “PPP, we did not intend to deny the deductibility of ordinary and necessary business expenses, nor did the small businesses expect to lose deductions for their business expenses when they apply for a PPP loan.”
However, that letter was sent in May 2020.
And today, it seems that Congress is very divided and coming up with any solutions looks challenging to say the least.
As a tax professional, if we don’t include the loan deductions and the loan is not forgiven, then our client’s income will appear higher.
But if we do include the deductions and the loan is forgiven, then our client’s income will appear lower.
This lack of guidance is impacting business owners ability to plan their cash flow for 2021.
Or even worse, their ability to stay in business.
People are basing business decisions on this forgiveness of the loan and are obviously worried about their ability to make future loan payments.
That’s why, it may be best to wait a few more weeks in hopes of getting more guidance, or a new proposed solution.
We expect that the Senate will be back in session on November 9, so hopefully we get some clarity very soon.
2. State Taxes
Another thing that is developing around PPP loan forgiveness are state taxes.
Some states may tax forgive the PPP loan proceeds.
So while the federal government may exclude the PPP from gross income, some states may include it.
Each state that implements income taxes has its own revenue code that conforms to some degree to the IRC which stands for Internal Revenue Code.
Here’s a map of income tax conformity based on states from the Tax Foundation.
If you are in a rolling conformity state, that means that your state will automatically comply with the current codes, which means your state likely won’t impose any taxes on PPP proceeds.
If you are in a static conformity state, that means your leadership can vote on whether to comply with current codes or the original IRC.
According to Jared Walczak, Vice President of State Projects with the Center for State Tax Policy at the Tax Foundation, “A state could argue that it only conforms to the definition of gross income expressly stated in the IRC.”
So yeah, that’s pretty complex.
But the bottom line is that there are still a lot of questions around PPP loan forgiveness and whether it will be taxed by the States.
So sometimes the best action to take is no action at all. And even some lenders are urging people to hold up.
But remember, this is not financial advice and everyone’s situation is different.
So if you have a PPP loan, then I highly recommend that you talk to your Certified Public Accountant about it and if you don’t have one then please reach out to us for help. We would love to guide you with your business financial management and taxes.