Unlike your Christmas shopping, you don’t need to rush your PPP Forgiveness Application.
The PPP Forgiveness Application is riddled with uncertainties that most applicants just want to get it over with, despite the fact that they are given the opportunity to fully utilize a deadline. Generally, the borrower is given on or before the maturity of the loan to apply for forgiveness, which is in 2 or 5 years’ time. However, if you have fully spent your loan, you can choose to apply for forgiveness right away.
Most borrowers will think settling the loan right away will be the best strategy because nobody likes a cloud hanging on their heads. Don’t we all just want to wipe the slate of our credit, clean? Well, you should think again. In this article, we will discuss the factors you should consider when planning for your forgiveness application. In this case, patience makes you more than virtuous, it could create financial benefits for you and your business.
The multitude of changes regarding SBA Forms
Since the release of the first SBA Form, Form 3508, there have been numerous changes, updates, and clarifications about it. Since then, Form 3508EZ and Form 3508S have been released, targeted to specific borrowers.
Anecdotally, changes cause more confusion. You could be one of the few who are thinking that you have missed your chance to apply for your PPP Loan Forgiveness because of the date written on the upper right corner of the loan forgiveness application forms (3508, 3508EZ, and 3508S). The SBA has clarified that the deadline was not October 31, 2020, as found in the upper right corner. The SBA explains that borrowers may submit a loan forgiveness application any time before the maturity date of the loan, as stated in Q&A №4 in the General Loan Forgiveness FAQs section.
But it will be advisable for the borrower to remember that loan payments are deferred only until 10 months after the last day of each borrower’s loan forgiveness covered period. If the borrower does not apply for forgiveness within 10 months after the last day of the covered period, the payment of the loan is no longer deferred and the borrower should start paying the principal interest. For example, a borrower with a covered period that ends Oct. 30, 2020, has until Aug. 30, 2021 (10 months) to apply for forgiveness before loan repayment begins.
The SBA explains that the expiration date in the upper-right corner of the PPP loan forgiveness application forms is only there to comply with the Paperwork Reduction Act. The date represents the temporary expiration date for the approved use of the forms, the SBA said, adding that once a new expiration date is approved, it will be posted on the forms.
Time is your friend
In the beginning, provisions set the covered period at 8 weeks, which meant you had 8 weeks to spend the loan for qualified expenses in order to be eligible for forgiveness. Recent amendments extended it to 24 weeks. This amendment from the PPP Flexibility Act meant the business owner has more time to exhaust the loan towards eligible expenses.
Seeing that the end of COVID-19 is nowhere near in sight, new amendments and laws could be well underway to change this covered period yet again. With all these updates, waiting for clearer instructions isn’t so bad. Just remember, you have until 10 months after the end of your loan’s covered period to apply for forgiveness before you need to start repaying the loan.
There is a possibility that some guidelines are interpreted differently by different bodies. For example, consider the plain language of the Paycheck Protection Program Flexibility Act (PPPFA) the SBA interpreted differently in a later Interim Final Rule. Section 3(b)(8) of the PPPFA expressly provides that unless 60% or more of the loan proceeds are used for payroll, no forgiveness will be allowed.
However, the SBA later stated that the better interpretation of the provision is that the 60% number is to be applied on a proportional basis instead of a cliff, thus allowing borrowers to seek forgiveness even though less than 60% of the loan proceeds were used for payroll costs. Even though the words were plain enough, their interpretation may change due to the guidelines provided by SBA.
For the past months, there has been a lot of gray areas regarding the requirements, as a result, there has been a steady flow of guidance released.
· On August 4 and 11, 2020, the SBA posted 11 pages of guidance — the Frequently Asked Questions (FAQs) on PPP Loan Forgiveness and updated the Interim Final Rule on Appeals of SBA Loan Review Decisions under the PPP,
· On August 24, 2020, it posted the Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs
· On October 8, 2020, it posted Interim Final Rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Rules;
· December 9, 2020, another FAQ was posted.
Just because 2020 is ending, doesn’t mean that these guidelines will stop anytime soon. We advise you to expect more and be vigilant in following any new developments.
On April 30, 2020, the IRS issued Notice 2020–32 finalizing once and for all that expenses covered by PPP Loans can’t be a deductible expense and the income associated with the forgiveness is excluded from gross income
On November 18, 2020, the IRS provided additional guidance in the form of a Revenue Ruling and Revenue Procedure. That additional guidance essentially provides (1) PPP loan borrowers may not deduct certain expenses if they have applied for forgiveness or could reasonably have been expected to apply for forgiveness by year-end, and (2) in the event the taxpayer is denied forgiveness or irrevocably decides not to seek forgiveness, the taxpayer will be permitted to claim those deductions in either the taxpayer’s 2020 or a future tax return.
The non-deductibility of expenses from the PPP loan could cause some interesting consequences in your finances. In another article, we talked about how it could cause you to pay more taxes. The borrower is then advised to evaluate whether or not by taking this loan he could be paying more taxes. Further, the taxpayer should keep intricate documentation in order to back-up his qualified expenses. This way tax preparation at year-end will be easier.
Many legislations have been attempted to be passed in order to change the non-deductibility of the expenses from the loan. But none have been approved. However, there are proposed bills in Congress to change this fact, and waiting before filing that forgiveness application could be the reason why you qualify to make these expenses deductible.
Take time to gather your documents and double-check calculations
The extended period also allows you to make sure you thoroughly prepare the documentation needed for the review during the forgiveness application with the SBA. You can’t make the excuse that the documents are retained. Remember that the SBA has the right to request any documents that they would need for their review, even retained ones.
Delayed documents make for delayed or even denied applications. Nobody wants that.
Wrapping up the PPP Forgiveness Updates for 2020
This year has been nothing but predictable. It has been full of startling revelations in every turn and the PPP Loan is not an exception. Of course, these challenges are to be expected in dealing with the unknown. Perhaps, it is for this reason that we advise you to maximize the use of the time given to you by the SBA. Holding out until the last minute allows you to wait for better guidelines and permit you to use the money for other projects or save it to bolster your cash flow.
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