6-minute read
If you got a paycheck protection program (PPP) loan from the Small Business Administration (SBA), then you managed to retain your employees. You can also get forgiveness for the same SBA loan, but it depends on several criteria.
Should you be in a rush to apply for PPP forgiveness? What do you need to know?
What is a PPP Forgiveness application?
A successful PPP forgiveness application enables you to get a waiver of the PPP loan you received from SBA. You no longer service the loan since the SBA cancels it off. Thus, you can now channel the premiums to other income-generating activities.
Conditions for the forgiveness
- You need to have used the loan for payroll expenses, mortgage, rent, and utilities. Apart from the payroll expenses, the other 3 expenses should have accrued before Feb 15, 2020.
- All expenses should have taken place within 24 weeks after receiving the first payment of the loan from your lender.
- Sixty percent (60%) of the loan should have catered for payroll expenses.
- Your number of employees should have remained the same.
- Your total salary level should have remained at 75%.
- You adhered to the rehiring grace period.
If you meet the listed requirements, then you can fill the application form and qualify for forgiveness. You might be feeling a powerful urge to apply for forgiveness. But, do you need to apply for the PPP forgiveness now?
The answer is NO.
The following timing considerations discuss why you need to apply for forgiveness:
The constant evolution of the program
Forms and Process
As of October 2020, the SBA had posted 3 forms: Form 3508, 3508EZ, and 3508S. The last form appeared on October 8, 2020, and it was addressing loans under $50k. Since June 2020, the first 2 forms are yet to undergo any update.
However, there is pending legislation that seeks to forgive loans under 150K automatically and do away with the compliance and paperwork for the forgiveness. If the legislation passes, then you will not need to fill the forms to get the forgiveness.
SBA timing
The SBA started accepting forgiveness proposals from lenders on August 10, 2020. However, the proposals were subject to any legislative changes that will come from the pending bill.
Given that the PPP forgiveness will start being subject to legislation, there will be more changes. If the changes will be in the favor of the borrowers, then you will benefit more from not submitting your application now. Having patience will enable you to realize more benefits.
Lender timing
Given the uncertainty regarding the outcome of the pending bill, lenders are reluctant to receive, review, and approve forgiveness applications. Under the SBA provisions, lenders have a lender equivalent form and they have a right of approval of the borrowers' forgiveness requests.
Thus, some lenders are processing the application forms in batches while others are using an invitation-only approach. One of the current determinants of approval is the loan date. However, some lenders have halted the approval process until the covered loan period lapses.
There is a high probability that the U.S. Treasury Department and the SBA will give more guidelines on the process of forgiveness. Thus, do not be in a rush to apply for PPP forgiveness.
Necessity Questionnaires
In October 2020, the SBA provided 2 forms that the PPP lenders should give to their borrowers of over $2m loan. The for-profit borrowers were to receive form 3509 while the not-for-profit borrowers were to receive form 3510.
However, there is an expectation that the SBA will offer further guidance. Thus, the 2 forms are non-conclusive and SBA can ask you for more requirements.
Guidance evolvement
In the past, the SBA made a change regarding the 60% rule. The change was because of the PPPFA interpretation of the rule. Thus, expect more changes from the Treasury and SBA as the 2 bodies strive to interpret the forthcoming Acts.
You should also expect further pandemic bills. Thus, you should not be in a rush to file the forgiveness application. Just wait for the changes that will take place soon.
Since August 2020, SBA has posted 3 changes:
- August 4, 2020: the posted change was about the FAQs on PPP loan forgiveness.
- August 11, 2020: the change was about the interim final rule regarding appeals.
- August 24, 2020: the change addresses the interim final rule on certain non-payroll costs and treatment of owners.
- October 8, 2020: the change was about the interim final rule regarding the additional revisions.
Given that the changes took place under a brief period, there is a high probability that the SBA will make additional changes soon. Thus, you need to wait for more guidance that will help you make an informed decision on when to apply for forgiveness.
IRS deductible expenses
On April 20, 2020, the IRS allowed some deductions for expenses incurred under the PPP loan. However, it considered the deductions as non-allowable when the borrower receives a PPP forgiveness. The IRS also considered the income generated from the forgiven loan as non-deductible from the gross income.
If you apply for forgiveness, then be prepared to suffer certain tax consequences. The move will increase your tax burden. So, take your time to make all the tax considerations before submitting the forgiveness application.
Even though you are in a rush to take advantage of the PPP forgiveness, slow down, and assess the negative impact of the move. Thus, do not apply now.
Footnotes
https://bench.co/blog/operations/ppp-loan-forgiveness/
https://www.jdsupra.com/legalnews/why-you-may-want-to-wait-to-file-for-55349/