The Small Business Administration (SBA) has started processing loan forgiveness applications. Almost 96,000 applications have been submitted so far. Should you submit your application now or wait? Here are some things to consider:
1. Deduction for certain expenses: The IRS recently ruled that expenses paid with forgiven amounts are not deductible this year, and if you reasonably expect the loan will be forgiven next year, are not deductible next year either. This can result in a large and unexpected tax bill for which you need to plan.
There is some discussion in Congress that they may overturn the IRS position with new legislation. We recommend you be patient and wait to see what Congress may do.
- Forms and process: As of October 2, there is a form 3508 for those who may have changed payroll, and form 3508-EZ for those who do not have any changes to payroll. There are legislative proposals to reduce paperwork and streamline the process for loans under $150,000, but to date Congress has not passed any new legislation.
- SBA timing: While the SBA is accepting submissions, it will likely be a slow process.
- 4. Lender timing: Your lender may or may not be ready to receive and review forgiveness applications. Lenders can use their own “equivalent form” which may need amending. Many are still not ready to begin processing. BMO Harris is submitting forgiveness applications for loans over $150,000, Chase is not submitting any, and smaller banks are submitting any they receive.
- 5. Guidance will evolve: Guidance from the SBA will likely continue to evolve. On October 3, they issued a notice for those who either had or are considering sales or mergers of their business. There are now 3 forms you can use, depending on your loan amount and other circumstances. Further guidance is likely.
- Extended time on PPP loans: If the borrower received their loan before June 5, 2020 the act allowed the borrower to use an eight-week covered period or it could be extended to 24 weeks. If you do not apply for loan forgiveness within 10 months after the last day of the covered period or if the SBA determines that you are not eligible the loan is no longer deferred, and the borrower must begin paying principal and interest. If you take advantage of the full 24 weeks you may have more time to take steps that will allow you to qualify for loan forgiveness. However, you may also increase the amount of interest that you pay on any part that is not forgiven.
- Documentation is critical: You need to make sure that you have all the documentation that your loan forgiveness application requires. The lender has an obligation to work with you if it discovers problems that will delay your forgiveness application. However, you will be better off getting the documents put together ahead of time because the SBA has the right to ask for information.
- Calculations: You are responsible for calculating the loan forgiveness amount even though many lenders will have their own calculators. The American Institute of CPAs has a PPP forgiveness tool which will allow you to double check your bank’s calculations.
- Loans over $2 million: The SBA has stated that it will review loans in excess of $2 million including the borrower’s self-certification that the loan was necessary. If you are subject to this review you should take additional time to prepare, gather, and organize any documents that you can.
- Change in business structure or sale or merger: If you have changed your business structure or have entered into a merger or sale transaction, you may need to get approval either from the lender or the SBA. On October 3, the SBA issued notice 5000 – 20057, which outlines their requirements.
Until then, we recommend the following:
- Gather your payroll numbers and other covered expenses for the loan period.
- If anybody has resigned, make sure you have something in writing from them that they quit. This will not necessarily affect the amount forgiven.
- If your payroll has changed, find a CPA or lawyer with a calculator to help you run the numbers.The situation is frustrating, so you will need to be patient.