Paycheck Protection Program Update
By Jeff Dick, CPA
Most of you have likely heard about the PPP, and how it was enacted as part of the CARES Act. The intent of the PPP was to help provide funding for businesses to continue operations during the early stages of the pandemic, with a focus on retaining employees on payroll. The program has gone through many changes/updates since it’s creation, including the extension of the covered period from 8 to 24 weeks.
Most businesses who received PPP funds from the SBA have either hit the end of their 24 week covered period, or are nearing the end. With the completion of that period, the next question to ask is “How does the loan forgiveness process work, and when should I apply for forgiveness?” As is the case in most governmental programs- the answers aren’t all as clear as we’d like.
As of today, all businesses who want to apply for forgiveness of the PPP loan must complete and submit the appropriate application to their lending institution. There are three different applications- Form 3508S, Form 3508EZ, and Form 3508. Which Form you complete depends on your situation, and each Form requires different documentation to be submitted along with the signed Form. Form 3508S requires the least supporting documentation, while the full 3508 requires the most.
Form 3508S- Businesses with loans under $50,000
Form 3508EZ- Self-employed businesses with no employees, or businesses who did NOT reduce employee pay rates by more than 25% and did not reduce Full-Time Employee (FTE) numbers
Form 3508- Businesses who DID reduce employee pay rates by more than 25% and reduced FTEs
Because the rules surrounding what expenses are/are not allowable for the forgiveness, businesses need to be very careful with what they include on their application. The inclusion of disallowed expenses could lead to the denial of forgiveness by the SBA- which would require some/all of the loan to be repaid.
Currently, the deadline to timely file the forgiveness application is 10 months from the end of the 24 week covered period. Once the businesses has submitted the application to their lending institution, it then has 60 days to process the application and submit to the SBA. Once the SBA receives the application, it then has 90 days to approve or deny the forgiveness request.
The 10 month period to submit the application is important, because as of today, there are still some very important unknowns concerning the program and its effect on income taxes:
- Under current Treasury regulations, any expenses paid with PPP funds are non-deductible. In effect- this means any PPP loan amount forgiven is taxable income.
This did not appear to be the intent of Congress when they created the PPP. There have been discussions in Congress to fix this, but as of today, the forgiven PPP funds would essentially be taxable.
- If the PPP funds are indeed taxable, there is uncertainty regarding WHEN they are taxable. Some professionals feel the funds would be taxable in the year the loan is forgiven by the SBA (possibly 2021), while others feel the funds would be taxable in the year they were used (2020).
Because of the complexity of the forgiveness application process and the uncertainty surrounding the possible taxation of the forgiven PPP funds, we suggest you talk to your tax professional to discuss your situation. If you have unanswered questions, MHCS has put together an experienced team that is here to answer them- just let us know how we can help!
Jeff Dick, CPA | Director