“Forgiveness says you are given another chance to make a new beginning.” —Desmond Tutu
The CARES Act provided many US businesses a chance for a new beginning following COVID closures and interruptions. During 2020, 5,460 lenders made 5.2 million PPP loans totaling $525 billion. The average loan was just over $100,000. That’s a lot of money and a lot of paperwork. And the fun is just beginning. While many loans have already been forgiven, many borrowers have yet to request forgiveness.
Meanwhile, the rules continue to change. In October, the SBA issued new forms and paperwork for loans over $2 million and in November the IRS clarified its position on the deductibility of expenses covered by the loans, neither of which were good news for businesses. And the brightest in the business say we have not heard the last of it.
Recent IRS guidelines say taxpayers cannot claim a deduction for an expense if the payment of the expense results in forgiveness of a PPP loan. While this is the authoritative rule in place today, things could still change. Bills from both the Senate and House have included provisions making the expenses deductible, but the chances of passage during 2020 aren’t good. Taxpayers may be wise to extend 2020 tax returns if the matter is not settled before Spring filing deadlines.
On November 24 I co-hosted a webinar with Corinna Creedon, CPA, New York Advisory Services Practice Leader for BKD CPAs and Advisors who shared her wisdom on the topic. Her best advice? Chill. For many, there are good reasons to delay until 2021 rather than rush to request forgiveness now. Some highlights and excerpts of the session follow:
Part 1 – Know your Dates
There are several dates borrowers need to know: the loan date, the beginning and end of the 8 or 24-week period for eligible expenses, and the timelines for submitting your forgiveness request, receiving approvals from your lender and final approval from the SBA. In the unhappy event that not all your loan is forgiven, you will care about this approval timeline because it dictates when you’ll need to start making payments on any balances owed. If you are certain that 100% of your loan will be forgiven, it is probably safe to apply now. If not, or if your loan is $2 million or more, it may be better to delay until 2021.
Review the Video on the Timeline of Forgiveness: Know Your Dates – Video 1
Part 2 – Tackling the Process
Once your dates are known, determine which form to submit and where to find the information to complete it. Your lender’s loan processing portal will likely help with this. Having an outsourced payroll service may also make things easier. Still, it will take substantial skills and resources to complete the process and you might need help from a trusted professional.
Review the video on Tackling the Process – Video 2
Part 3 – – PPP Loan and Financial Statements
In this segment we discuss how PPP loan proceeds are treated on financial statements, which may impact a borrower’s compliance with covenants tied to other loans.
Review the video on PPP Loan and Financial Statements -Video 3
Part 4 – Tips and Traps: Get Your Numbers Right
You will need a lot of detailed information about your payroll and you must reconcile all wages, taxes and net payroll checks to your bank statement. Payroll service reports may help, but don’t assume they are accurate for your situation. Review them carefully.
Review the video on Tips and Traps-Get Your Numbers Right – Video 4
Part 5 – Tips and Traps: Reductions
How much of your loan amount will be forgiven? Even if your eligible expenses are reduced because you cut wages or staff, you may still be forgiven for 100% of the loan. How can that be? Your loan amount was based on 10 weeks’ expenses. You may use a 24-week period to determine your eligible expenses. If staff or wage cuts result in a reduction, the adjustment is subtracted from what you spent in 24-weeks. The net result can still easily exceed the loan amount, in which case 100% of your loan could be forgiven.
Review the video on Tips and Traps-Reductions – Video 5
Part 6 – Loans Over $2 million
New Form 3509 (draft released October 28. 2020) has some borrowers on edge. The Loan Necessity Questionnaire is required for those who, together with their affiliates, received more than $2 million of funding. The form documents information that would be used by SBA loan reviewers to evaluate your initial good-faith certification that economic uncertainty made the loan request necessary. You likely certified necessity based on what you knew in March. The form collects information to assess business activity and liquidity issues for Quarter 2, things you would not have known until June. What if your business didn’t suffer as much as you thought it might, and the results of Quarter 2 make it clear the loan wasn’t necessary after all?
It is unclear what the SBA will do with this information or how they will view eligibility, but borrowers clearly must be careful about how they complete the form. The determination may be subjective, and only information included on the forms and supporting documentation you submit would be usable in an appeal of the SBAs determination of forgiveness. You get one chance to provide everything you’ll need – so you absolutely must get this right.
Our advice: Chill. Consider delaying your request for forgiveness until the dust settles on this one. It is unlikely the matter will be settled before February and there is organized push-back from business groups with significant lobbying power.
Review the video on Loans over $2 million – Video 6
Should I Delay my Request for Forgiveness?
Ten months after your 8 or 24-week covered period ends you must start making payments on the loan. If you have yet to request forgiveness, the loan payments would be high so it’s best to complete the process by that time. For example, if you received your loan on June 1, a 24-week covered period ended November 16, so ideally you would want to complete the process by September of 2021. Based on recent experience, we know the rules could change by then.
We recommend starting on the necessary forms, reconciling eligible expenses to bank statements, and preparing all the necessary calculations and supporting documentation soon after your forgiveness period ends. If your loan is less than $2 million and your work shows the loan should be forgiven in full, you may wish to submit and be done with it. Remember – once you submit, you cannot change the information you provide. So just to be safe, have your work reviewed by your CPA or a trusted advisor who has completed several submissions already.
If your work indicates some of the loan will not be forgiven, it is not the end of the world! You will have a long-term loan at 2% interest. Your next step should be to ask your CPA for help reviewing your calculations and aligning your submission date with your cash flow plans for 2021 and beyond.
Special thanks to Corinna Creedon of BKD CPAs and advisors. If you have additional questions, contact Corinna at email@example.com. She has graciously agreed to provide a complimentary 30-minute consultation if you mention Profit Soup sent you!