When the PPP loan was given out earlier this year during the peak of the pandemic, numerous small businesses lined up to receive their money. The most attractive part of the program given the economic situation that most were in, was the fact that the funds were forgivable—either in part, or in some cases all. Now as the forgiveness process is under way of course many business owners are racing to turn in their forgiveness applications. There are some though, who suggest that it might be best to slow down.
What the Tax Professionals Are Saying About PPP Loans
Beginning in April and ending on August 8, the PPP loans totaled right around 525 billion. This was funding that many companies did in fact need to survive lest they face having to shut down for good. All told, roughly five million PPP loans were given out. And again, a driving factor for many was that the loans could be forgiven and the debt effectively wiped out. The stipulation was that applicants had to dedicate sixty percent of the funds to payroll related expenses in order for the loan to be forgiven. If they devoted less than this, they could still potentially receive partial forgiveness.
Starting this fall, the SBA has announced that the forgiveness processing will begin. For those companies who took out 50k or less, the SBA offered a simplified application to help expedite things. Many are now engaged in the process of filling out these applications. Lenders as well are prompting their clients to get those applications finished before they have to start paying back the loans which could be as early as next month for some.
In fact, some lenders are sending letters to applicants that verge on scare tactics, reminding clients that the loan comes due next month and if they fail to apply for forgiveness, they will be responsible for repayment.
Here however is where tax professionals diverge from lenders regarding when exactly a borrower should apply for forgiveness of their PPP loan. In fact, some tax professionals are suggesting applicants might fare better if they wait rather than attempt to hurry the process along.
Why wait? Why not just get the forgiveness application in now? A great deal of it has to do with the inherent uncertainty surrounding not just forgiveness, but the entire PPP program in general.
Tax Deductibility Issue With PPP Loans
Currently, Washington is embroiled in trying to figure out how and what exactly to do for the next round of relief tied to the pandemic. This includes any decisions regarding how to help small businesses who’ve used all of the PPP loan.
One of the primary issues with this program is that of tax deductibility. Many business owners and tax professionals/accountants are struggling to try and figure out the best way to proceed in this regard.
The problem is that borrowers who did use PPP loan cannot deduct for those expenses where PPP money was used. There are some in Congress, to include Republicans and Democrats, who are in fact pushing for a bill that would allow small businesses to deduct costs covered by PPP funds.
The issue of deductibility is extremely important especially given the current climate. Without being able to write off large expenses, an owner’s taxable income is a great deal higher than it otherwise would be. This means ultimately they will be paying more in taxes for 2020—potentially a lot more.
This is precisely why many financial professionals are telling clients—particularly those with large loans and subsequently large deductions—to hold off as far as applying for forgiveness right now.
It also becomes difficult in terms of not having a set answer on the deductibility issue to plan for cash flow needs next year. In so many aspects the PPP program and the forgiveness portion of it are still just so unclear. Business owners are worried that if they don’t receive forgiveness they are looking at large loans that will need to be paid back. And they are also quite anxious about the deducibility aspect of the loan. With many lenders constantly pressuring them to apply for forgiveness, entrepreneurs may be making a decision before they are ready…or need to for that matter.
Who Should Apply for PPP Loan Forgiveness Sooner Rather than Later?
Those who did get smaller PPP loans—those who took out less than 50k and/or sole proprietors with no employees—do have a fairly streamlined process as far as forgiveness goes. So applying now may be in their best interest. Talking to a tax professional first however is probably going to be the smartest path.
Applicants who have loans that are on the larger side and have a fair number of employees might be better off waiting to see how the debate among lawmakers shapes up. Gaining more clarity could help them make better choices, choices that are apt to be more economically sound. Some experts are suggesting businesses wait a few weeks. The Senate is back in session come November 9th and we may by then have some greater certainty regarding what future stimulus bills might look like.
First Union Lending is here to help. We have been working with small business owners since the beginning of this crisis. We are invested in seeing our clients survive and ultimately thrive. With short term loans, SBA loans and lines of credit among other products, we have a solution to fit just about any business need. There is no one size fits all approach with us. Even if you just need additional capital to weather the storm, we can certainly help. Call today and let’s get started together.