So what should CPAs be doing now? The wise course is to begin preparing the forgiveness application and stay on top of documentation requirements but also be patient with the process as substantial areas are settled. To help you explain the current situation to business owners and leaders, let’s take a look at a collection of PPP questions, key facts, and best practices.
A pair of gray areas
Two of the biggest areas of uncertainty remaining with PPP forgiveness are the following:
Deductibility of expenses: Forgiven PPP loans are not taxable income, but IRS Notice 2020-32 declared that no tax deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP-covered loan. The position is that allowing the deductibility of expenses paid with PPP funds would result in a double-dipping scenario.
Given the severity of the pandemic’s impact on U.S. businesses, the AICPA believes Congress intended PPP expenses to be deductible. Lawmakers from both parties have voiced support for this position, but that has not yet translated into congressional action.
Blanket forgiveness: Most PPP loans were for $150,000 or less. Because the PPP loan forgiveness process can be tedious, members of Congress have proposed legislation that would allow for a much simpler process of streamlined forgiveness for loans under a certain amount. The commonly discussed threshold is loans of $150,000 and below, but that could change, and there’s a possibility that blanket forgiveness won’t ever be granted.
In an ideal scenario, borrowers won’t file for loan forgiveness until the questions surrounding tax-deductibility and automatic forgiveness are resolved. Of course, we have no idea when that will be, which leads us to…
3 key facts about PPP loan forgiveness
Borrowers eager to get PPP loans forgiven may want to know the deadline for forgiveness applications and whether they can submit applications early. If they are a co-owner in the company where they work, they may also want to know if they are subject to the stricter PPP compensation replacement calculations for owner-employees.
Forgiveness application due date: There is no defined deadline for borrowers submitting the forgiveness application, but borrower payments will be required 10 months after the end of the covered period as explained in FAQ No. 3 of the PPP Loan Forgiveness FAQs.
Borrower submission of a forgiveness application does trigger deadlines for lenders and the SBA. Section 2(a) of the Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures gives lenders 60 days after the forgiveness application is received to issue a decision to the SBA. The SBA then has 90 days after receiving the decision from the lender to review the application and remit the forgiveness amount to the lender with any interest accrued through the date of the payment.
Early applications for loan forgiveness: These are permitted, but there’s a catch: An eight- or 24-week covered period will still apply. For loans funded before June 5, 2020, borrowers can choose to keep the eight-week covered period or move to the 24-week period. If the loan was funded after June 5, 2020, the borrower must use a 24-week covered period.
Definition of an owner-employee: The PPP loan forgiveness application established a PPP owner-employee compensation rule for determining the amount of their compensation eligible for loan forgiveness. The application did not define owner-employees, causing a good amount of confusion. An FAQ published in early August defined an owner-employee as someone who is both an owner and an employee of a C corporation. An interim final rule issued Aug. 24 established that the PPP owner-employee compensation rule does not apply to individuals with less than a 5% stake in a C or S corporation.
For more information, the AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
Click here to read the original Journal of Accountancy article