By AMY GOODMAN, CPA
Can you imagine a year with more ups, downs, twists and turns than this year? Navigating the everchanging terms of the Paycheck Protection Program (PPP) has certainly contributed to this rollercoaster ride. Alas, we have assembled the following tip and recently issued guidance to assist you in navigating the application process for requesting PPP loan forgiveness.
Background
As a reminder, earlier this year, the CARES Act provided for the issuance of PPP loans as a means of helping businesses maintain certain expenses, particularly payroll, during the COVID-19 shutdown. The Act intended for these loans to be forgiven if certain requirements were met. Generally speaking, the forgiveness of a loan results in taxable income to the loan recipient. The CARES Act explicitly provided that businesses should not be taxed on the proceeds of a forgiven PPP loan. Many have wondered whether the loan would indeed escape taxation upon forgiveness. We now know the answer.
Will I Be Taxed on the PPP Loan Proceeds?
Although the CARES Act stated that forgiven loans would not be taxable, the CARES Act did not address whether expenses paid using forgiven PPP loans would be deductible for income tax purposes. The IRS released guidance over the summer, and again in November, stating that expenses paid using PPP loan proceeds that are forgiven cannot be deducted for income tax purposes.
What if the SBA has not issued a determination on my forgiveness application by the time I file my 2020 Business Tax Return?
The SBA has provided certain requirements with respect to the turnaround time of the forgiveness application by lenders. Lenders have 60 days after receipt of the forgiveness application to issue a decision to the SBA. The SBA then has 90 days after receiving the decision from the lender to review the application and remit the forgiveness amount to the lender.
The outlined turnaround time means that it could take 5 months from application filing to determination of forgiveness. Consider this timeline in contrast with the due date for filing most S Corporation and Partnership tax returns, which is generally March 15. The result: many businesses may need to file their tax return before a forgiveness decision is reached.
If you are in this position, the Treasury and IRS have provided the following instruction: any business which reasonably believes that a PPP loan will be forgiven in the future should treat the expenses related to the loan as not deductible in 2020. In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses through one of two options: either amending the 2020 tax return to allow the previously disallowed deductions, or possibly deducting them in a subsequent year.
By what date do I need to file my forgiveness application?
There is no defined deadline for borrowers to submit the forgiveness application. The SBA explains that borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from the loan’s origination, depending on the borrower’s agreement. But the SBA also reminds borrowers that loan payments are deferred until 10 months after the last day of each borrower’s loan forgiveness covered period. This means that most likely you would want to submit well in advance of that date.
Most banks have opened their portals for applications. It may be advisable to get your application filed sooner than later with the hope that you receive a decision before filing your business tax return. Extending your business tax return on March 15 will also help if a decision has not received from the SBA, however, as always, any tax due for 2020 will still be due by April 15 when you file or extend your individual income tax return.
Finally, some are still hopeful that the tax impact as currently outlined will be “fixed” in future stimulus legislation. Having said that, it will be most prudent to start planning for additional income taxes owed on the 2020 tax return assuming no changes are made.
Resources for more information:
https://www.sba.gov/document/support-frequently-asked-questions-ppp-loan-forgiveness
Amy Goodman is a CPA and Partner at Peter J. Freuler & Associates, CPAs. Freuler & Associates is a central Florida accounting firm devoted to assisting practitioners and practices in the healthcare industry maximize their business’ income, while minimizing the tax impact. For more information contact amy@pjfcpa.com or visit www.pjfcpa.com.
