PPP Forgiveness: Apply Now Or Wait?

The Paycheck Protection Program (PPP) was a huge component of the CARES stimulus package aimed at helping smaller businesses and non-profits stay afloat in the beginning of the pandemic. The program was fraught with administrative changes and nuances, but nonetheless 5.2 million loans were granted for a total of about $525 Billion dollars. The PPP was intended to provide support for payroll and the SBA reported that the PPP positively impacted 51 million jobs. A big question is: When do I apply for forgiveness? Now, like my bank wants me to, or later?

The most immediate issue facing you as a PPP borrower, is assuring your loan is forgivable. For most applicants, their PPP loan was calculated using 2½ months of their 2019 payroll or self-employment income. Originally, PPP loan proceeds had to be spent within 8 weeks of receiving the loan. That period was extended to 24 weeks. If you received a PPP loan for $350,000 in March, had forgivable expenses of the same amount within the 24-week period, and met the other rules (there are always “other rules”), the entire loan is forgiven. Forgivable expenses are payroll (with pay caps on owners, highly compensated staff and certain fringe benefits) plus rent, utilities and mortgage interest.

The forgiven amount is tax-free. However, the IRS has ruled that the expenses paid with forgiven PPP loan proceeds are not deductible. So, if your company got a $350,000 PPP loan and used it to cover part of your payroll, $350,000 of your 2020 payroll expense would not be deductible. The IRS just ruled that PPP funded expenses are not deductible no matter when your PPP loan is forgiven (now or in 2021). There is a possibility that pending legislation would allow PPP-paid expenses to be deductible while keeping the forgiveness as tax-free; however, that’s only a possibility and it’s generally not prudent to base your tax planning on “possibilities.”

You must apply for forgiveness within 10 months after the end of the ‘Covered Period.’ which is the 24-week period that starts when you received your PPP loan. The lender (i.e. your bank) has 2 months to process your loan forgiveness application then SBA has three additional months to approve your forgiveness. Here are some additional nuances you need to be aware of:

‘Quickie’ Forgiveness Form (3508S). If your PPP loan was $50,000 or less and you used all of the funds for payroll and other forgivable expenses, you can use a form 3508S. It’s a one-page form where you affirm that you used the loan for qualified expenses. You don’t submit any expense documentation with the application but agree to keep all of your documentation for 6 years. It doesn’t get much easier than this. Don’t qualify to use the 3508S? There is a “Plan B” that might simplify your forgiveness process.

EZ Form (3508EZ). As the name suggests, form 3508EZ is rather ‘easy’ to file. (Of course, your idea of ‘easy’ may not coincide with the perceptions of the IRS and SBA.) If you can satisfy at least one of the following three requirements, use form 3508EZ. This form eliminates the need to submit your employee headcount and payroll reduction documentation; however, you will need to document that you spent your PPP funds for qualified payroll and non-payroll (e.g. rent, utilities, mortgage interest) expenses.

1.     You are self-employed and have no employees

2.     You did not reduce the salaries or wages of your employees by more than 25 percent and did not reduce the number or hours of your employees from January 1^st through the end of your Covered Period. (Remember, your “Covered Period” is the 24-week period from the date you received your PPP loan proceeds.), or,

3.     You experienced reduced headcount as a result of complying with CDC, HHS or OSHA health directives related to COVID-19 and did not reduce the salaries or wages of your employees by more than 25 percent.

The Main Forgiveness Application. If you don’t fit the mold of the 3508S (loan $50,000 or under) or the 3508EZ, you must file form 3508 and supply the headcount calculations and documentation that your funds were spent on qualified payroll and non-payroll expenses. If you chose to use a 24-week Covered Period, your qualified payroll cost will probably exceed your loan amount, so you’ll only need to submit payroll records – greatly simplifying the documentation process.

Over $2 million? Prove It: At the outset, certain large PPP loans generated controversy regarding their necessity. To address this valid concern, the Treasury announced all loans over $2 million will be subject to full audits. In early November, the SBA published a ‘necessity questionnaire.’ The questionnaire is rigorous in determining the necessity of a PPP loan. If a borrower fails this test, its loan will not be forgiven. There are two versions of the questionnaire, one for for-profit entities and another for nonprofit organizations.

When to apply, now or later? Now we get to the big question: When should you apply for forgiveness? There are two schools of thought: apply now while we know the rules and before things could change for the worse; or delay application until after the year-end and see what might come out in subsequent leadership or stimulus bills. To get a handle on this, I did an informal poll of CPA firms in Michigan (I’m a task force leader at the Michigan Association of CPAs). My poll asked if they were advising their clients to apply now or wait. I solicited input from professionals working in a wide range of firms, from the largest in the state to sole practitioners. I also asked for commentary. Here are the results:

·       Under $50,000 (for-profit and nonprofit) with no staff or payroll reductions – apply now (pretty much unanimous by comment)

·       Self-employed with no employees – apply now

·       For-profit entities that must file form 3508 – 85% of respondents said ‘wait’ and 15% said ‘apply now’

·       Commentary on loans over $2 million was to carefully review the questionnaire and maybe even consider repayment

I’ll throw in my 2 cents; I’d vote to wait. You have 10 months from the end of your Covered Period, which gives most of us until sometime in August of 2021 to apply. By then, we may have another stimulus bill that may allow for the deductibility of PPP-funded expenses (the possible HEROES act). In addition, they (Congress) may increase the automatic forgiveness amount to $150,000 (chatter from DC).

Bottom line: If you are a nonprofit with a PPP loan under $2 million and have enough evidence of forgiveness, apply now. If you have a PPP under $50,000, and used it for payroll, apply now. If you are self-employed and have no employees and got the PPP, apply now. For the rest of the PPP recipients, most CPAs I surveyed think waiting is better than rushing.

As always, I’ll try to respond to questions. My e-mail is llabrecque@sequoia-financial.com