It’s time to check in on the PPP loan program! As a reminder, the PPP was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, which was signed into law on March 27. For those of you who received PPP loan funds, most of you are through your 8-week covered period and some through your 24-week covered period, depending what period you elected. Now the year-end looms and you are eager to receive forgiveness; however, filing for and receiving forgiveness has an impact on taxes and the timing of it carries potential tax opportunities.
By now you may have heard that although congress said that the PPP loan forgiveness income was intended to be tax-free, i.e. to be tax-deductible, the IRS, in its Notice 2020-32, said that forgiveness of the income would cause non-deductibility of the expenses paid with PPP funds. This results in effectively taxing the forgiven portion of your PPP loan in its entirety! Any portion not forgiven that remains a loan is of course not income and there is no issue there.
By now you may have also heard that congress has been working on a Phase IV type business relief. Both the Senate and House have various forms of bills they would like passed and they have been negotiating for a while now. The AICPA has continued to push for true deductibility as a top priority in its advocacy with Congress and Treasury Secretary Mnuchin, however, there needs to be legislation to attach to for any amendment for deductibility. Unfortunately, it is looking like we will not see a deal anytime soon with the election limbo, however, the AICPA is still very hopeful that we will eventually see deductibility.
In the meantime, what do you do about tax planning for estimated tax payments and return filings?
There are many open questions concerning overlapping years for forgiveness and deductibility. For example, what if you have a June 30, 2020 year-end and you incur expenses but clearly had not applied for forgiveness. Or what if you have a December 31, 2020 year and you are just now be contemplating filing for forgiveness. It is possible you won’t know about forgiveness until 2021 even though you spent your PPP funds in 2020. In that case, it is still considered a loan at year-end and your expenses are not yet considered “non-deductible”, at least that is how most are interpreting it. But then what happens when you do receive forgiveness in 2021? As of right now, those expenses become non-deductible. Then the question arises, in what period will you lose deductibility? Is it in 2021 or retroactive to the year they were paid? Unfortunately, that is not clear. We are awaiting IRS guidance on this issue. The AICPA’s sources have said that this issue is less urgent to Congress since those returns will not be due until 2021 and Congress and Treasury and SBA are dealing with more pressing issues. Plus, it all goes away if they add a deductibility provision as Congress originally intended to a new stimulus package.
Another issue is that the tax rates could be different between the years 2020 and 2021 depending on how the election plays out. Another complicating factor is if you have an NOL that you will carryback and how that plays in as well. So, there are more questions than answers, but planning is still wise as it does matter for estimated tax payment purposes and this is a timely issue.
One prudent approach is to calculate a low and high estimate – one estimating we will eventually receive deductibility on the loan forgiveness income and one estimating that nothing changes. The high estimate would mean effectively that you have additional taxable income in the full amount of your PPP loan forgiveness. For some, this could be quite high. You need to plan now for the worst case and make your best-educated decision on what you want to pay in. Your future cash flow needs also need to be considered. No one can decide for you on what to pay in, but at least you can take your best shot at the right answer for you and your cash position.
Another prudent decision would be waiting as long as possible to file your tax return until we have more guidance and the crossing year-ends issue is resolved. This would especially be wise if you have business in various states as those states may or may not have followed the federal guidance on this issue and related Covid issues.
Now another scenario is that you did use your funds in the 8 weeks or 24 weeks and applied for forgiveness already. The SBA may or may not have a response for you by year-end as they are just now starting to approve applications. But if they did approve it, in your case all would be in the same year. You would have forgiveness income, which would trigger non-deductibility of the related expenses you paid. So, you still have the issue of needing to consider a low and high estimated payment for the 4th quarter because the deductibility issue could go away. You could be in a position where you pay in the higher amount and didn’t need to, tying up needed cash for operations unnecessarily that could have been used to keep your business afloat until the next stimulus or the economy turns around. This will be your call, but you should be aware of your high side risk.
Then you could be in the camp where you are still in or will be finishing your covered period and have not yet applied for forgiveness and are not sure when to do that. There are some factors to consider in your decision of when to file for forgiveness. Your loan payments will begin 10 months after your covered period ends, so most people consider 10 months the filing deadline.
In general, the CPA community is saying to wait until the dust settles and we see what happens with deductibility. This is wise; however, there are some circumstances where filing for forgiveness sooner rather than later is necessary. If you plan to sell more than 20% of your business or affect a merger, you will have to notify your lender and your transaction could need the approval of the SBA or need to hold back 100% of the PPP proceeds in escrow until forgiven at a minimum. (There is an SBA Procedural Notice on this issue.) So, rushing forgiveness approval could be the key to reducing transaction headaches or roadblocks for PPP recipients. Additionally, if your business has plans to layoff more workers, once you file for PPP forgiveness, the look at your FTE count stops. As you know, FTE count reductions can count against you with forgiveness, so it is wise to plan your forgiveness application timing asap if you need to make personnel cuts. Lastly, most banks understand the PPP loan, but these are considered debt on your books until forgiveness, so bank covenants will be impacted.
Hopefully, we will all know more after the election is officially finalized and Congress gets serious about negotiations.
Want to learn more?
For further information about the PPP loan program, see AICPA published SBA Paycheck Protection Program (PPP) FAQs dated October 21, 2020. The AICPA also has a portal for you to be able to calculate forgiveness and create an electronic package for your bank. See www.aicpa.org/sba for these resources.
In summary, if you have PPP funds, consult your CPA for tax considerations sooner rather than later.
Please reach out if you any questions! We are always here to help.