Timelines for PPP Forgiveness Causing Confusion for Tax Planning
Filed under:COVID Updates
The Paycheck Protection Program (PPP) has provided businesses with much needed relief from the economic impact of the COVID-19 pandemic by providing over $525 billion of forgivable loans to small businesses. While these funds have provided a much needed sigh of relief to these business owners, the specifics of the loan forgiveness and timing are causing a significant amount of confusion among tax professionals and the businesses they serve.
According to the rules, businesses that have taken a PPP loan can decide to pick either an 8-week or a 24-week “covered period.” After the covered period has ended, borrowers have 10 months to apply for forgiveness. Once submitted, the lender/banker has 60 days to review the application and make a determination on forgiveness. Then, assuming they have approved the request for forgiveness, the lender/banker would request reimbursements from the Small Business Association (SBA). The SBA then has 90 days to approve the request from the lender and may either deny, partially approve, or fully approve the request. The lender/banker must then notify the business of the decision and, if not fully approved, the business has 30 days to notify the lender/banker that they would like to have their application reviewed by the SBA.
So, let’s say that you received your PPP loan on June 1st, 2020 and you decided to choose a 24-week covered period. This means that your covered period would end on November 16th, 2020. In this example, let’s assume that you apply for forgiveness on December 1st, 2020. Based on the rules above, it’s possible and very likely that you may not receive confirmation that your forgiveness request has been approved by the business tax filing date of March 15th, 2021. In fact, your business isn’t required to apply for forgiveness until October 1, 2021 which is well after the extended filing date for 2020 tax returns. Business owners are extremely confused about whether the forgiven loan increases taxable income in 2020, when the loan was received and spent, or in 2021, once they’ve had confirmation that the amount is forgiven.
When initially passed, federal law made forgiveness of the PPP loans non-taxable, but no documentation was provided about the deductibility of the expenses paid with the PPP funds. After much confusion, the IRS issued Notice 2020-32 which made it clear that any expenses used under forgiven PPP loans would not be deductible. For practical purposes, this essentially makes it the same as treating the forgiven loan as taxable income and also deducting the expenses.
As we get closer to year-end and tax filing season for the 2020 tax year, businesses are left confused about how to treat the expenses paid for with PPP funds if they haven’t yet had confirmation that their loans have been fully forgiven. Should they be treated as deductible expenses on the 2020 returns or should they be treated as non-deductible expenses assuming the loan will be forgiven? At this point, we are unclear on the answer to this question. If we don’t have an answer to this question by the original due date of your tax returns, it may make the most sense to file an extension so that you can be certain your application for forgiveness was officially approved.
We still hold out hope that Congress will pass a bill that would allow those expenses used with PPP funds to be fully deductible, but given the current political environment, we are not holding our breath. We recommend discussing these issues as you begin planning for year-end as well as estimated tax payments for 2020 and 2021, as the decisions made (or not made) by Congress will have significant tax planning opportunities.