The week of August 12 marked the first week that the Small Business Administration would be accepting applications for PPP loan forgiveness. But businesses are being advised not to jump in too quickly. Several questions continue to linger over tax implications that can make a significant difference in how much a business reports in taxable income. Businesses should wait for further guidance and the possibility of new legislation that can provide more certainty on these issues before filing their applications.
As businesses approach the end of their covered period, which was extended from eight weeks to 24-weeks, they must prepare their applications and documents for loan forgiveness. Loan proceeds used to cover at least 60% of payroll costs are forgivable. Even if proceeds were used to cover less than the 60% threshold, they could still be partially forgiven. Loans issued before June 5 that are not forgiven must be repaid within two years, or five years for loans issued after that date. The PPP provides businesses with a six-month grace period before payments must commence, at which time they are charged a 1% interest rate.
PPP Rules Still Not Etched in Stone
However, even at this late date, the SBA is still issuing new guidance that could impact how businesses prepare their reporting for loan forgiveness. That occurred as recently as two weeks ago when the SBA issued new guidance clarifying that vision and dental benefits paid by an employer can be included under group healthcare benefits as eligible payroll costs. We suspect more clarifying guidance will be forthcoming.
The biggest, cloudy issue facing businesses is the deductibility of expenses paid with PPP loan proceeds that are forgiven. The IRS has stated that, since forgiven loan proceeds represent tax-free income to the business, those expenses cannot be deducted. From its Notice 2020-32, the IRS states
"…no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan…and the income associated with the forgiveness is excluded from gross income…"
Wait and See on Deductibility Issue…
However, there is a movement in Congress to change that to allow businesses to deduct those covered costs. Whether that change emerges from the next COVID-19 relief bill currently stalled in Congress, or separate legislation as proposed by Sen. Chuck Grassley, R-Iowa, remains to be seen. But there is a growing consensus that such as change is warranted.
The deductibility issue is critical because, although the forgiven debt isn't going to increase a business's taxable income, the inability to deduct expenses could. That would make the business worse off for taking the loan, which was not the law's intent.
…But Prepare to File Application
With that cloud of uncertainty blanketing the forgiveness process, businesses may want to take a wait-and-see approach to submitting their applications. While it may make year-end tax planning a bit more challenging, there's no reason to delay the preparation of the application and documentation.