Smart Tax Planning

PPP loan borrowers are being steered toward forgiveness. Why they should slow down

Key Points
  • The CARES Act established the Paycheck Protection Program for small businesses experiencing difficulties amid the coronavirus. Generally, the loans are forgivable if at least 60% of the proceeds go to payroll expenses.
  • The Small Business Administration and Treasury Department recently released simplified forgiveness applications for firms that borrowed $50,000 or less.
  • Some lenders are nudging applicants to apply, which might not be the best call for all businesses. Plenty of tax planning details remain up in the air for PPP loans.
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Small businesses that took a forgivable loan this year — as well as their banks — can't wait to have the balance wiped out, but tax professionals are telling them to slow down.

The CARES Act, which went into effect this spring, established the Paycheck Protection Program, an emergency line of funding for small businesses suffering during the coronavirus pandemic.

Between April 3 and Aug. 8 — the last day a firm could have applied for a loan — more than 5 million PPP loans were approved, accounting for $525 billion, according to data from the Small Business Administration.

Applicants are eligible for forgiveness if they devote at least 60% of the proceeds to payroll expenses. Firms that fall short of the amount may be eligible for partial forgiveness.

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This fall, the SBA and Treasury Department have signaled that they're ready to start processing loan forgiveness. In October, the SBA rolled out a simplified application (known as Form 3508S) for businesses that received a loan of $50,000 or less.

Borrowers can apply for forgiveness at any time up until their loan matures. If they don't apply for forgiveness within 10 months after the last day of the covered period – the 8-week or 24-week period for using the proceeds – then borrowers will have to start making payments.

"No one should have to make a payment this year unless they have applied for forgiveness, and their lender has received a forgiveness remittance from the SBA and there is a remaining balance," said an SBA spokesperson.

Nevertheless, some banks are sending borrowers letters encouraging them to apply to have the balance wiped out or make plans to begin payment.

"Thank you for trusting Florida Credit Union with your Small Business Administration (SBA) Paycheck Protection Program (PPP) loan," read one email to a borrower, obtained by CNBC.

"Your loan obligation is coming due with your first payment due date on 11/15/2020," the missive went on. "Please note, this loan is not a grant. As a reminder, you need to apply for loan forgiveness using the link below."

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The wording is enough to scare applicants into hurrying the process — which could be a huge mistake, tax professionals said.

"I was on the phone with the vice president of a community bank who tried to argue with me that it's in the client's best interest to apply for forgiveness right away," said Adam Markowitz, enrolled agent and vice president at Howard L Markowitz in Leesburg, Florida.

"Under no circumstance is that true," he said. "Is it more beneficial to apply for forgiveness now?

"There is no harm in waiting."

Uncertainty continues

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Tax professionals have shied away from marching clients toward forgiveness because so much remains uncertain around the PPP loan program.

Lawmakers have spent the last few months fighting over the next round of Covid-19 relief, including the next steps for cash-strapped PPP borrowers.

Tax deductibility is at the heart of the conflict for small businesses and the tax professionals aiding them.

Forgiveness of the PPP loan is tax-free, but borrowers won't be able to claim tax deductions for the business expenses covered by forgiven loan proceeds, according to the IRS.

These are $300,000 to $400,000 loans they'll have if they're not forgiven, so this is hanging over their heads and they're anxious to be done with this portion of PPP.
Nicole Davis
founder and principal at Butler-Davis Tax & Accounting

Meanwhile, members of Congress on both sides of the aisle have pushed for deductibility. Sens. Chuck Grassley, R-Iowa, and Ron Wyden, D-Ore., proposed a bill that would permit small businesses to deduct those covered costs.

Deductibility is important because entrepreneurs' taxable income will appear higher on paper without those write-offs.

This could also affect their eligibility for certain tax credits when the time comes to file their 2020 returns.

"People with big loans and large deductions, we're telling them to hold off," said certified financial planner Dan Herron, CPA and principal of Elemental Wealth Advisors in San Luis Obispo, California.

"If we include the money, they have income," he said. "If we don't, they have a loss."

Lack of a clear path forward on deductibility is also affecting business owners' ability to plan their cash flow needs for 2021.

"People are basing business decisions on forgiveness, and they're worried about making loan payments," said Nicole Davis, CPA, founder and principal at Butler-Davis Tax & Accounting in Conyers, Georgia.

Indeed, some of her PPP borrower clients have received notices from their lenders, encouraging them to apply for forgiveness.

"These are $300,000 to $400,000 loans they'll have if they're not forgiven, so this is hanging over their heads and they're anxious to be done with this portion of PPP," Davis said.

Easy forgiveness for some, not all

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Proceed cautiously if you've received a notice from your lender, and talk with your tax professional before you apply for forgiveness. Sometimes the best course of action is inaction.

The smallest borrowers — namely sole proprietors with no employees and firms that took less than $50,000 — may have a simplified process for forgiveness.

Meanwhile, applicants with heftier loan balances, a workforce that's shifted significantly over the course of the year and other moving parts might be better off waiting for more certainty.           

"Just wait a few more weeks and let it play out," said Megan Gorman, founder and managing partner of Chequers Financial Management in San Francisco.

"We don't know what will happen in future stimulus bills, and the Senate isn't back in session until Nov. 9."

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