PPP loan forgiveness: How the waiting game can pay off in the long run

PPP loan forgiveness: How the waiting game can pay off in the long run

The Paycheck Protection Program (PPP) has been a lifeline for businesses. At the same time, it’s been yet another source of uncertainty in a tumultuous year. Unfortunately, this trend continues as we near the end of 2020, thanks in part to the recent IRS notices regarding the non-deductibility of PPP-funded expenses. Right now, the question on many business owners’ minds is this: Should I apply for PPP loan forgiveness now, or wait until 2021?

As you might have guessed, there isn’t a straightforward answer. Here are the factors you should consider when determining when to apply for forgiveness.

You aren’t required to apply by the end of 2020.

PPP borrowers may submit a forgiveness application at any time before the maturity date of the loan—there isn’t an end-of-year deadline. However, in order to not have payments on the loan, you must apply within 10 months from the last day of the loan-forgiveness covered period. As you may recall, the original eight-week covered period was extended to 24 weeks for borrowers. So, if your PPP loan was funded on April 1, 2020, the last day of your covered period would be October 1. You would need to apply for forgiveness by August 1, 2021, to avoid payments starting on the loan.

Keep in mind, however, the lender facilitates the forgiveness process. Your lender will review your forgiveness application and, if approved, forward it to the Small Business Administration. Be sure to give your lender enough time to process the application (i.e., don’t wait until the last minute).

As long as your PPP loan is forgiven, its interest will be, too.

Your lender has been accruing interest on your PPP loan since the start of your covered period. However, you are not required to make interest or loan payments during the covered period, nor during the 10-month window in which you could apply for forgiveness. Also, interest will not accrue during the time you’re waiting for the SBA to approve your forgiveness application.

As long as your PPP loan is fully forgiven, its interest will be, too. However, if a portion of the loan is not forgiven, you will be on the hook for interest and loan payments. Furthermore, if your application is denied, any remaining balance on the loan must be paid on or before the loan maturity date. If you don’t apply for forgiveness within 10 months, your loan payments are no longer deferred.

The IRS’ stance on non-deductible expenses isn’t set in stone.

In November, the IRS issued revenue ruling (Rev. Rul. 2020-27), providing that taxpayers who received a PPP loan and reasonably expect forgiveness in 2021 cannot deduct loan expenses in 2020. In other words, the IRS defines the PPP loan as tax-exempt income and is not allowing taxpayers to reap a double tax benefit.

Right now, there are two bills in Congress to challenge the IRS on this stance: the Small Business Expense Protection Acts of 2020, and the Protecting the Paycheck Protection Program Act. Members of Congress have also discussed legislation that would automatically forgive any loan amounts under $150,000. The AICPA has expressed its opposition to non-deductible expense treatment as well.

It’s possible the IRS could change course on its treatment of PPP loan expenses. The good news is, the 10-month period in which you can apply for forgiveness overlaps with 2020 tax deadlines (March 15 for S corporations and partnerships, and April 15 for individuals). So, it might be worth extending your business and personal tax returns so you can wait and see what Congress does in the coming months.

On the other hand, although the general consensus is that we won’t see sweeping tax reform in 2021, we’re cautious of the possibility (and keeping a close eye on the Georgia runoff). If circumstances indicate tax reform in 2021, consider picking up the non-deductibility of PPP expenses in 2020. However, if the IRS ends up allowing them to be deducted, you would more than likely have to amend your 2020 return.

To wait, or not to wait for PPP forgiveness?

In light of the continued uncertainty, waiting to apply for PPP loan forgiveness may be a wise move—but only if you’re confident your loan will be fully forgiven. If you’re unsure of your forgiveness status, or if your bank is signaling that you should apply (and you have borrowed a lot of money from this bank), you might want to go ahead with applying for forgiveness this year. You may also want to apply now if you’re selling your business, as you don’t want the PPP loan on your books.

If you’d like to explore your options for PPP forgiveness, Elevate can advise you on the right timing for your RIA firm. Contact us today to get started.