Your Money, Your Future
Your Money, Your Future

PPP loan forgiveness starts this week. Why some businesses aren't rushing to apply

Key Points
  • The Paycheck Protection Program offered small-business owners forgivable loans to keep their doors open. At least 60% of the proceeds must cover payroll costs to be eligible.
  • More than 5 million businesses received funding, accounting for $525 billion, according to Small Business Administration data as of Aug. 8 – the last day the program was available.
  • The SBA opened its forgiveness portal to receive applications from lenders, but tax professionals advise clients to wait as further guidance is released.
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The Small Business Administration opened the forgiveness portal for its Paycheck Protection Program loans this week, but companies may want to think twice before rushing in.

The CARES Act made these PPP loans available to cash-strapped small businesses starting on April 3. Since then, more than 5 million loans have been approved, accounting for $525 billion, according to SBA data as of Aug. 8 – the last day firms could apply for a loan.

The program attracted a bevy of applicants, since the loans are forgivable if borrowers devote at least 60% of the proceeds to payroll costs. Even if a business fell short of the threshold, partial forgiveness may be an option.

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Repayment terms are also attractive: Firms pay an interest rate of 1% and have a six-month grace period before making repayments.

Loans issued before June 5 must be repaid in two years, while those issued after that date mature in five years.

Even though the forgiveness window is open, small businesses are sitting on the sidelines, accountants said. That's because the SBA continues to issue guidance in the form of frequently asked questions.

For instance, on Aug. 11, the agency clarified that employers' payments toward vision and dental benefits are considered "group health-care benefits" and are deemed payroll costs eligible for forgiveness.

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Professionals are also still waiting for Congress to address a burning issue on the mind of many PPP applicants: Will expenses covered by these forgivable loans be deductible on tax returns?

"My advice on all of these clients is that you don't want to be the first to rush into the forgiveness process," said Ann Kummer, CPA and partner at Kirshon & Co. in Poughkeepsie, New York.

"Things will probably continue to change," she said. "Do you really want to be the guinea pig?"

Uncertainty in Washington

House Speaker Nancy Pelosi, D-CA, (R) speaks to the media, flanked by US Senate Minority Leader Chuck Schumer, D-NY, after meeting with the White House Chief of Staff and the US Treasury Secretary on coronavirus relief at the US Capitol in Washington, DC on August 7, 2020.
Mandel Ngan | AFP | Getty Images

Lawmakers continue to spar over the next Covid-19 relief bill, and tax professionals are wondering whether the legislation will cover the issue of deductibility.

Forgiveness of the loan will be deemed tax-free. However, business owners who take the loan won't be able to write off expenses that would otherwise be deductible if they use those PPP funds to cover the cost and then obtain forgiveness, the IRS said.

Members of Congress disagreed with this. Sens. Chuck Grassley, R-Iowa, and Ron Wyden, D-Ore., proposed a bill that would permit small businesses to deduct those covered costs.

Sens. Marco Rubio, R-Fla.; Tom Carper, D-Del.; and John Cornyn, R-Texas, co-sponsored the legislation.

The cancellation of the debt isn't taxable income, but if you can't deduct wages or rent, that's a whole other big wrinkle.
Glen Birnbaum
CPA at Heinold Banwart

The deductibility matters because a business owner's taxable income might seem higher on paper if he or she is unable to deduct the costs covered by the loan.

Since the matter is up in the air, applying for forgiveness now might be iffy.

"The cancellation of the debt isn't taxable income, but if you can't deduct wages or rent, that's a whole other big wrinkle," said Glen Birnbaum, CPA at Heinold Banwart in East Peoria, Illinois. "What if you apply for forgiveness and the loan is forgiven, what's the rule at the time?"

An agonizing wait

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As difficult as it may be to wait, the safest move for now might be to see how lawmakers proceed before taking a chance on applying for the forgiveness – particularly if you need certainty on  deductibility.

In the meantime, shore up your paperwork so that you're ready to apply.

Borrowers should maintain a separate business account for their loan proceeds, accountants said.

They should also maintain documents that show how the funding is spent and keep formal books and records.

The uncertainty makes for shaky tax planning for the rest of the year, but at least you'll have your documents ready to go.

"You might not know your profit until you know whether the IRS will allow us to deduct it," said Kummer. "The current guidance says no, but that could change, too."