Armanino Blog

Congress Is Stuck in Neutral: Implications for PPP Forgiveness and Taxes

by John Schweisberger
September 28, 2020

With yet another stimulus impasse declared by Congress, prospects for significant changes or enhancements to the Paycheck Protection Program (PPP) look dim, at least until after the election when both houses rebalance. This further adds to the confusion among borrowers and lenders. We try to shed some light on the forgiveness aspect of the equation below.

When Should I File My Forgiveness Application?

This question has been posed more than any other over the past few months. There is a widespread misconception that borrowers must wait until the end of their 24-week Covered Period to file (a myth even perpetuated this week by the highest-volume PPP lender in the nation). It is simply not true.

In the Interim Final Rule issued by the SBA and Treasury on June 22, 2020, two separate examples indicated that borrowers could file before the end of their Covered Period, but would still be bound by the 24-week defined length of the Covered Period for purposes of the Salary Reduction Factor.

With that freedom put in place, borrowers can apply for forgiveness at any time between the date the loan funded and 10 months after the Covered Period ended.

So, why file sooner rather than later? There are several reasons:

  1. Freedom – If your Covered Period hasn’t yet ended, submitting your forgiveness application to your lender now stops the clock on the FTE Reduction Factor, which is the biggest impediment to achieving 100% forgiveness. This allows you to make whatever business decisions you need without worrying about a potential forgiveness impact.
  2. Balance Sheet – Carrying the PPP loan on your balance sheet into 2021 could affect your financial ratios, which might violate covenants you hold. Even though the loan can reasonably be expected to be forgiven, it will be easier to have a clean balance sheet at year-end.
  3. Tax Alignment – If you can get forgiveness wrapped up before December 31, 2020, you will easily align the expenses that drove the forgiveness with the forgiven amount, making your tax return much easier to figure out.
  4. Mergers/Acquisitions Activity – If your organization is involved in a transfer of ownership, it will need to be disclosed to the lender and will have an impact on the ultimate responsibility for the PPP liability. It may also change FTE calculations if the M&A work involves staff changes.
  5. Rear-View Mirror – Let’s face it, 2020 has not been the most fun year, and most people would prefer to put it behind them. The emotional relief of having the PPP in the past can be worth more than everything else combined.

But Isn’t Congress Going to Just Give Blanket Forgiveness?

They haven’t yet, despite numerous proposals that generated lots of press. And as of late September, there isn’t any indication they will be anytime soon, either, unless it’s politically desirable to suddenly break the impasse as the election approaches. For the time being, it appears to be suitable for each party to appeal to their base with “look what we tried to do/keep the other side from doing,” leaving millions of borrowers in the middle of the fight.

While it remains possible that some kind of simple attestation process for smaller loans might see the light of day — especially given how much Congress and the SBA have tinkered with the program already — delaying your forgiveness application on a hope can create unintended consequences that may not make it worth the wait. Like what? Read on.

What About Those Tax Impacts?

Here’s where Congress did no one any favors with extending Covered Periods to 24 weeks and giving borrowers up to 10 months later to file for forgiveness: They brought tax planning into the mix of what was originally a simple in-year program.

When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was created, borrowers had eight weeks to use the money and two years to pay back whatever wasn’t forgiven. Applications would have been filed during the summer, the SBA would have processed the reimbursements to the lenders before year-end, and everyone would have been satisfied.

Since forgiveness is normally considered taxable income but the CARES Act waived that little problem, the loan simply comes off the books assuming 100% forgiveness. But then the IRS issued a notice in late April signaling to Congress and taxpayers that they interpret the tax law to prevent the expenses used to qualify for forgiveness from being deductible on the borrower’s tax return, even though expenses such as rent, payroll and utilities normally can be deducted. It’s a position that has been questioned by some practitioners. Out went the forgiveness tax benefit.

When the PPP Flexibility Act was signed into law on June 5, things got a lot more complicated. Many borrowers will not have their forgiveness approved by the SBA when the calendar turns to January. So, what to do with those expenses? Since the loan is still on the books at year-end, borrowers will face a choice of deducting them as usual on their 2020 tax return (thereby lowering the tax bite for this year) or reserving them for next year so they match up to the forgiveness benefit coming in 2021 (thereby increasing taxable income for 2020).

Many people would choose to kick the can down the road, take the deduction this year and deal with next year’s taxes when the time comes. This is a perfectly reasonable approach to take. However, when forgiveness is granted in 2021, the expenses that would have otherwise been deductible in 2020 cannot be deducted since they are expenses tied to the forgiven income (according to the IRS). Ultimately, deducting those expenses on your tax return may require an act of Congress to fix the issue stated in the IRS notice.

And here’s the rub: As much as the PPP program has been changed, it is not outrageous to imagine a suddenly changed Congress deciding in 2021 that they need ways to pay for all the stimulus given out in 2020, so maybe a tax hike is in order or perhaps some of the favorable terms of the PPP should be changed. Those playing the waiting game might end up losing their chair when the PPP music stops.

What Does It All Mean?

Congress and the SBA have proven predictable only in their unpredictability. The PPP program has provided millions of borrowers with thousands and even millions of dollars of “free money” (at least, until it gets taxed) when they needed it most. They have consistently interpreted in favor of the borrower in their Interim Final Rules, but yet have stalemated on additional relief.

For borrowers, the program has been of great benefit to the American economy, despite its flaws and occasional abuses. The time to file is now, while the rules remain in the borrower’s favor and there is a chance to avoid a tax and financial statement nightmare.

September 28, 2020

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