If you received proceeds of a loan under the federal Paycheck Protection Program (PPP) in 2020, you are probably wondering if, when, and how those loan proceeds will be forgiven, and how you should treat them when you file your tax returns.
If you’ve spoken to your accountant about this, you’ve probably gotten a response along the lines of “wait and see.” Which isn’t really helpful when you know you have a tax return due on April 15.
With a new Congress and a new head of the Small Business Administration taking office in a couple of weeks (Isabel Guzman, former SBA deputy chief of staff during the Obama administration and director of California’s Office of the Small Business Advocate), it’s a bit hectic in Washington right now. Finalizing PPP loan forgiveness rules is probably not top of mind for many folks there.
But here are some things we do know.
How much can be forgiven? Pretty much the entire loan proceeds if you used them for payroll, rent, mortgage interest and utility expenses during a covered period of either eight or 24 weeks after disbursement of the loan proceeds (you get to choose the period).
But, as always, there are exceptions. If you laid people off during 2020, reduced your employees’ compensation in 2020 or used PPP loan proceeds to pay compensation to your business’s owners (that’s you and your business partners, if any), your ability to obtain forgiveness may be limited.
When must your loan be forgiven? You can apply for forgiveness anytime after the loan proceeds are used up and before the maturity date of the loan (either two or five years). If you have used all of the loan proceeds, you can apply for forgiveness now, although most accountants and tax advisors are advising their clients to wait until rules and forms are finalized.
Although you can wait until after you file your 2020 tax return to apply for forgiveness, if there is any question at all about your ability to claim 100 percent of the loan proceeds as an exemption from gross income, it is best to apply for (and obtain) forgiveness before you file your tax return. Otherwise, if all or a portion of your loan is denied forgiveness, you may have to go back and amend your tax return.
Small PPP loans can be forgiven very soon. Borrowers that received a PPP loan of $150,000 or less during the initial program (March to August 2020) should mark Jan. 20, 2021, on the calendar right now. That’s when the SBA is scheduled to release a simplified forgiveness application form for those loans, according to CPA and entrepreneurial tax expert John D’Aquila of Jacksonville, Florida.
The borrower of such a PPP loan must submit to the lender a certification of no more than one page in length with a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs and the total loan amount. The form will not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant stature or regulatory requirements.
What do you do on your taxes? A PPP loan that is completely forgiven is exempt from income. The portion of any PPP loan that is not forgiven must be repaid with interest (at 1 percent per annum) and, therefore, would be included as income on your tax return, with an offsetting deduction for any interest paid (up to limits imposed by the Internal Revenue Code).
This is why it’s important to know where you stand on forgiveness before you file your tax return this year. It may be prudent for many small businesses to extend their filing date until September or October 2021 until they and their advisors are 100 percent certain of the approach to take.
More good news: Not only are the proceeds of forgiven PPP loans exempt from federal income taxes but you can also deduct the expenses that were paid off with the proceeds of the loan. The IRS stated in rulings last year that such a double-dip wasn’t allowed, but Congress overruled those rulings in December 2020.
Nonetheless, it’s probably not a good idea to be too aggressive in deducting expenses that were covered by PPP loan proceeds, as the IRS is likely to give those deductions extra scrutiny.
What do you do after your loan has been forgiven? According to D’Aquila, PPP loan borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
Unlike the forgiveness of sins, the new law allows you to go forth and borrow some more. Consider taking out a second-draw PPP loan under the new rules), and let your qualified PPP lender know now you want to be put on the list of potential applicants.
A list of participating lenders can be downloaded in PDF format at https://www.sba.gov/document/report–ppp-participating-lenders-list-43020.