This article is current as of 5/20/20. The SBA has indicated that there will be constant, ongoing updates.
Many businesses have been fortunate enough to receive funds via the Paycheck Protection Program (PPP). These funds were initially disbursed as a loan, but some or all of the funds can potentially be forgiven. How much really depends upon a complex, and ever evolving set of rules (the first real guidance was release of SBA Form 3508, the forgiveness application, Worksheet A and instructions issued 5/15/2020).
The forgiveness application and instructions are not very straightforward, nor simple. The big take away from this article is that you should really be working with someone to discuss your situation, optimize your forgiveness, and to help you calculate and assemble the support for your forgiveness applications. Any mistakes on the forgiveness side of things could end up being very expensive.
Forgiveness in a Nutshell
When you receive your funds, your eight week (known as the covered period) forgiveness time clock begins ticking. For companies with bi-weekly or more frequent payroll, there is an alternative 8 week option which starts with the first day of the next pay period that begins after you’ve received your funds. However, the optional coverage period only applies to the payroll portion of eligible expenses while the initial coverage period applies for all other eligible expenses.
Potential eligible expenses include:
Forgiveness and Impact on Income Taxes
- Payroll (and benefits) costs. This is for payroll incurred and paid during the covered period. This area has the most complexity and caveats. Some of them involve impacts of reduction in pay or FTE headcounts, compensation annualized over $100K, and limiting rules around compensation to owners. The nuances and complexities are too deep to dive into beyond that, as what’s relevant to one person’s situation may be completely irrelevant to another person’s. This category also includes the employer’s contributions to retirement plans, health insurance, and state unemployment insurance tax.
- (Business) Mortgage Interest Payments. Debt must have been incurred before 2/15/2020.
- Business Rent or Lease Payments. Lease agreements must have been in force before 2/15/2020.
- Business Utility Payments. This would typically include water, electric, phone, internet, etc. that was in service before 2/15/2020.
In most cases under the federal tax code, when a loan is forgiven it is taxable income. However, when this program began it was clearly spelled out that the forgiveness of all or part of a PPP loan would not be taxable. Unfortunately, the IRS has released Notice 2020-32 which states that the expenses used for PPP forgiveness are not tax deductible. This, in essence, makes the forgiveness of the debt taxable (albeit by another name). As a simplified example, assume a business owner has a 24% tax rate and has $100K in PPP forgiven. They will now owe an additional $24K in 2020 taxes.
Eliminating the deduction of PPP expenses is in direct conflict with Congress’s intent, so there is still some hope that they will issue a fix for this. If not, business owners should really be ready for and plan for the tax implications of PPP debt forgiveness. It’s in all business owners’ best interests to eliminate the tax implications from PPP forgiveness, so we are encouraging business owners to contact
Senators Burr and Tillis and Representative Rouzer to encourage them to support a legislative fix.
Our goal today was to help you understand that the calculations and factors for PPP forgiveness are very complex. You should proactively approach PPP loan forgiveness to ensure that you maximize the expenses eligible for forgiveness and that your application for forgiveness is correct and properly documented. We know that like the initial application process, there is going to be a high volume of PPP forgiveness applications for the banks to work through. Lenders are going to be more likely to process and approve forgiveness applications for those applicants that are well organized and submit an accurate SBA Form 3508.
Caroline Montgomery, CPA (NC License Number 39017), MSA, is tax manager and partner of Adam Shay CPA, PLLC. The most rewarding part of what she does is helping business owners and individuals achieve their goals, all while working with a dynamic team that is growing quickly. The firm focuses on a proactive approach by encouraging clients to minimize taxes via income tax planning and projections, or by focusing on other areas of their business as part of the firm's Virtual CFO services. The firm also offers tax preparation, fraud and forensic accounting and tax issue resolution services. She moved to Wilmington in 2014 and started at the firm in 2015. Caroline graduated with her her undergraduate and graduate degree in 2010 from East Carolina University. She is actively involved with NourishNC as their Treasurer and enjoys volunteering with various organizations throughout New Hanover County. In her free time, Caroline enjoys spending time with her husband, Mike, and dog, Mason, as well as travelling and going to the beach.