We’ve been waiting for definitive actions from Congress related to a third stimulus package and/or any forgiveness updates for the Paycheck Protection Program (“PPP”).
As simple as PPP was designed to be, a seemingly endless series of “clarifications” caused confusion and complexity to the loan forgiveness expectation. Without clear guidance, many banks and borrowers are left trying to figure it out themselves.
(For a refresher on how the PPP program works and the changes since its inception, see this article.)
New forgiveness application
There is good news! About two weeks ago, the SBA released a new PPP loan forgiveness application for borrowers with loans of $50,000 or less. This now gives us three forgiveness application options:
- Form 3508S (for PPP loans of less than $50,000)
- Form 3508EZ (for those who did not reduce any employee headcount)
- Form 3508 (the full application for PPP loan forgiveness)
Required supporting documentation for forgiveness
While this new form may change the forgiveness application you submit to your bank, the required supporting documentation is still the same. As a reminder, PPP loan funds must be spent during your covered period (8 weeks or up to 24 weeks) as follows:
- 60% or more on payroll and compensation-related costs
- Remaining monies can be used toward rent (with limitations for any related party rental payments), utilities and interest on mortgages (secured by real or personal property used in business)
- Must maintain or return employee count levels to levels in February 2020
Please maintain supporting documentation that accurately represents how you used your PPP funds. If your PPP loan is for less than $50,000, your lender does not have to review your documents or submit them to the SBA with your application, but they can still request them at a later date to ensure compliance.
If our team is helping you with your PPP loan forgiveness applications, we will provide you with the necessary supporting documentation to sign off with confidence and integrity. Think of this process similar to your annual tax filing. We will compile, review and organize your important supporting documents so you have them in case of an SBA inquiry.
Aim to submit forgiveness applications by 11/30/2020
Although Congress may still release more PPP updates, we feel there is enough information to begin the application process for forgiveness. Our goal is to prepare your applications in the coming weeks so they are ready to submit to your banks by the end of November. Your bank has up to 60 days to submit your application to the SBA, and the SBA then has up to 90 days to make a decision.
Expenses paid with PPP funds are NOT tax deductible
Unfortunately, the IRS ruled in Publication Notice 2020-32 that expenses paid with PPP loan funds are NOT tax deductible. This is really unfortunate news, and we honestly thought Congress would override the IRS’ position. However, it seems unlikely at this point. Most state tax agencies are also considering these expenses non-deductible.
In your year-to-date quarterly tax planning, our team has planned for this non-deductibility and the impact on your taxable income. We have done our best to minimize any big tax surprises and build these amounts due into your tax withholding or estimated tax payment requirements.
Caution: Audits possible, as fraud is on the rise
As of October 7, 2020, the Justice Department has criminally charged 65 individuals with PPP loan fraud totaling $227,000,000 – now, that is still less than 1% of all PPP funds but it’s a lot of money nonetheless. The investigations focus on borrowers claiming phantom employees and using PPP funds for personal purchases and other non-permitted purposes.
Because of this fraud activity, the SBA has announced they will formally audit loans over $2 million (also less than 1% of all PPP loans) and audit “other PPP loans as appropriate.” I don’t share this to scare, but as a reminder that even though your PPP loan was under $2 million, you still need to have the documentation and support ready in the event the SBA selects your loan for further review.
Year-end tax planning
With the end of the year upon us, we are also gearing up for year-end tax planning and fourth quarter estimated tax payment recommendations. We will be reaching out to ask for your estimated income and expense for the last two months of the year so we can do an accurate year-end tax forecast for you. Please put some thought into this and respond to our requests in a timely manner.
Proud to be by your side
This has been a trying year, and we are so grateful that you entrust our team and allow us to share in your growth. We are proud to be by your side and look forward to helping you continue progressing toward your goals every day. Please don’t hesitate to contact us if you have any questions.