New guidance and a streamlined application clears the way for automatic forgiveness for some loans, but not all.
Over the past few weeks the Treasury has released a few changes to the PPP program, benefiting some but still leave many business owners scratching their heads wondering when banks will start accepting applications and forgiveness guidance will be finalized. As we are eyeing the end of the year, we're still recommending that clients do their PPP calculations so they can hit their Safe Harbor targets-- or at least know how much they are going to owe. It's important that these are done now, because as it stands today there is a tax implication for loan forgiveness.
New changes for loans under $50,000
If you have a loan under $50K, you will now be able to apply for automatic forgiveness, regardless if you laid off employees or reduced salaries by more than 25%. Using the new 3508S form, companies with loans under this threshold can apply for forgiveness of their full loan amount. On this simple application, you will not need to report any employee information, or make any loan calculations on the form itself. While this significantly reduces the administrative burden of filing for forgiveness, it is important to note you will still need to keep records and provide calculations in the event of an audit.
Not every company that has a loan under $50K can apply for automatic forgiveness. If you own multiple businesses that are affiliated with have multiple PPP loans that total over $2MM, you will not be eligible for this automatic forgiveness.
Are there any changes to the loan forgiveness requirements for loans over $50K?
With the average PPP loan size of $107,000, unfortunately many companies don't qualify for this simplified process and are still subject to the complicated loan forgiveness process.
There was hope that the Rubio-Collins bill proposed this summer would provide automatic forgiveness for loans under $150K. With future stimulus programs potentially stalled until after the election, and with this new streamlined $50K form, there is concern in our industry that the $150K automatic loan forgiveness will not be happening. This would result in all borrowers with loans above $50K fill out the long form and provide the calculations, documentations and details.
Still, we wonder how banks and the SBA, who ultimately determines loan forgiveness, will be able to handle the tidal wave of paperwork that needs to accompany each loan. As of this writing, only a handful of of small regional banks have opened their loan forgiveness applications to their borrowers. We assume most banks are watching for future changes to the PPP before they re-engineer their loan forgiveness application portals again. Most of our client's banks have been sending out notifications to "get ready" but few are live.
So what can you do to maximize PPP loan forgiveness?
Most companies that received loans in April and May are seeing their 24 week covered periods come to an end. It's important to remember that just because you were able to use all your PPP funds does not mean you will qualify for full forgiveness. The PPP Loan calculations as they stand today look at comparative time periods so if you have not restored headcount or employee salaries back to the reference period you may unexpectedly find yourself with a loan you will need to pay back. While the loan terms are quite favorable (5 year payback at 1%, deferred payments for up to 10 months after covered period ends), we think many companies may be surprised that they didn't meet all the requirements despite spending all the funds.
Whether your loan is less than $50K or over $50K accepting PPP funds makes you subject to an audit. Therefore, make sure you can justify you used the funds on allowable costs and you can document any adjustments you are taking to meet the requirements. At some point in the future, the government will be looking for ways to offset the cost of these programs and audit fees and penalties will become a growing source of revenue to do so. In addition, as it stands today, the expenses claimed under the PPP Loan forgiveness are not tax deductible so you should be consulting with your tax advisor on how PPP forgiveness will impact your tax liability and cash flow needs.
While loan forgiveness guidance appears to come out sporadically and in small bits from the Treasury, it doesn't mean you should wait until you have spent all the money. Do some planning now. Making sure you hit your safe harbors targets to achieve full loan forgiveness- or at least know what you may potentially owe-- will allow you to do the necessary planning for taxes and cash flow. And lastly, if you took a PPP loan, regardless of size, make sure you have all of your documentation in order, in case Uncle Sam comes knocking in a year or two.
If you need help with your PPP loan forgiveness calculation or are nearing the end of your PPP covered period and want to know if you'll be able to maximize forgiveness, give us a call.