• Derek Carter

PPP Forgiveness - What Should I Do Today?

[10.1.20] The number of customers asking, “Should I apply for forgiveness?” has risen significantly over the past two weeks. Given the increase, I want to get my opinion and recommendations out there. Clearly every business owner and business are different, so take a hard look at your situation before making any decisions. Reach out to support@ceterus.com if you need any help.

First let’s start with what has changed since the SBA forgiveness portal opened in early August. The answer is not much. The government has not reached an agreement on the next round of stimulus, which includes provisions for PPP forgiveness. The SBA and Treasury Department have not put out additional guidance related to forgiveness that has been meaningful. The only change is some banks are now telling their customers they are ready to take on forgiveness applications. Many of the large banks have yet to accept forgiveness applications (e.g. Chase and Wells Fargo). With this in mind let’s dive into what we know.

The SBA indicated that nearly 100,000 PPP forgiveness applications have been submitted, but none have been approved or denied. The forgiveness portal has been open for nearly two months and not a single application has been fully processed. It should come as no surprise that the forgiveness process is going to take time.

Lenders are struggling as well. “It is actually more complicated than any of us even thought,” said Jack Murphy, president of business banking at Citizens Financial Group, at a conference Tuesday of the Consumer Bankers Association. “It’s taking us two weeks to process an application. Four to six contacts between small business owners … and the folks that are trying to process the forgiveness applications.” This quote is not a good sign for borrowers out there. More than 5 million loans were granted under the PPP program and all of them must work their way through the forgiveness process with their lender. Granted, some of the complexity and significant time spent could be the lack of clarity in the rules of the program.

I continue to hold out hope that clarity is coming from Congress. As of this writing, Democrats and Republicans are negotiating again on the next round of stimulus, which is likely to include guidance on the forgiveness process. Many expect blanket forgiveness for loans under a certain threshold (we have seen $150,000 and more recently $50,000 in the news). There is also an expectation of reduced or complete elimination of reporting requirements for loans under a certain size ($150,000 tends to be the threshold reported on).

For many businesses, the most important effect of applying and receiving forgiveness in 2020 is the expenses used to achieve forgiveness will not be tax deductible. What does that mean? Let’s assume that your 2020 taxable income under normal circumstances would be $0 and therefore you do not expect to pay tax. Let’s also assume you received a PPP loan of $100,000. You used this loan to meet payroll obligations and achieved 100% forgiveness. The impact on your tax return is an increase in taxable income of $100,000. Again, the payroll expenses you used to achieve forgiveness are not tax deductible. If we assume your tax rate is 20%, your tax obligation would be $20,000. Applying and receiving forgiveness in 2020 could have a significant impact on your tax liability and eventually your operating cash when you pay that higher tax bill.

It is widely believed that Congress will step in and override the IRS opinion that forgiven expenses are not tax deductible. If and when that happens is not known. There has been very little talk recently on the subject as the entire focus has been on the next round of stimulus.

My recommendation? Wait to apply. I say that because of what we know today.

  • Expenses used to achieve forgiveness are not tax deductible

  • It is very likely more changes are to come related to the PPP program between now and the end of January

If you are itching to apply and get that loan off your books I suggest waiting to apply until December. That almost certainly will ensure you do not receive a forgiveness decision until 2021, which will buy you around a year to plan for any negative tax consequences related to achieving forgiveness.

Every business is different, so make sure you talk to your trusted advisor about your specific situation before making decisions on applying for forgiveness.