My excellent colleagues over at Wegner CPAs are providing yet another free webinar on the remaining Covid-19 relief programs for small business owners.
Do you still have questions about the COVID relief programs? Join us for an overview of what’s available and learn about any updates to the:
Kate Serpe, CPA, Senior Manager, joined Wegner CPAs as an intern in 2010 and was hired full-time as part of the Accounting Solutions Group in 2011. Kate has experience providing controllership and CFO services to cooperatives and not for profit organizations and specializes in board presentations and assisting clients with strategic planning.
Dan Bergs, CPA, Senior Manager, joined Wegner CPAs as an intern in 2008 and started full-time after graduation in 2010. He specializes in working individual and business clients providing them with a variety of tax and accounting services.
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Note: this is an update to an existing blog post — the instructions below are specific to the Biz2Credit PPP lending platform. If you received your loan through another platform, please see my original post.
For over a year we waited for legislation from Congress as well as guidance from both the SBA and IRS as to the interplay between the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). It appears the last of that guidance was issued on August 10, 2021 — so, at this point, as long as you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply. Which means that if you are a sole proprietor and have no employees, you are ready to apply — since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company.
For PPP draws in 2021, our firm participated in a joint program by AICPA and Biz2Credit called the “CPA Loan Portal”. We’ve prepared the following step-by-step instructions for clients of ours who were funded through this system — however, I believe the instructions are the same for small business owners who applied directly with Biz2Credit. (Let us know in the comments if this is the case or if you had to tweak the approach at all.)
First, a couple general comments for borrowers of $150k or less who are self-employed with no employees:
For self-employed with no employees, it’s an “owner compensation replacement” approach, which means you will have 2.5 months’ worth of your prior-year net profit (or gross profit, for those who applied for PPP funding under the last-minute changes to the rules) automatically forgiven. Your forgiveness amount should exactly equal your loan amount, presuming the original loan was calculated properly.
According to Biz2Credit on their July 1 webinar (from their PPP Forgiveness Required Documents Customer Guidebook), no documentation is required for sole proprietors with loans of $150k or less:
How-To Instructions for PPP Forgiveness – AICPA Biz2Credit Application – Self-Employed with No Employees
First things first, decide whether you’d like to fill out the forgiveness application yourself or whether you’d like your CPA firm to do it for you for a small fee. Once you’ve informed them that you’d like to DIY, they will need to “assign” the forgiveness application to you, which will trigger an email that looks something like this:
Once you log in to your account using the credentials you created when you signed the PPP draw application just before getting funded, you’ll be walked through a series of screens.
Click the “Apply for Loan Forgiveness” button.
Most of the information will be automatically filled in based on the initial loan application information. There is no need to enter information in any of the fields marked “(Optional)”. Click the “Confirm” button.
A pop-up should suggest you use the 3508-S application, the simplest one – click the Continue button to go to the Basic PPP Loan Information screen.
Covered Period Start Date should default to the disbursement date as the start date. The duration of the covered period can be anywhere from 8-to-24 weeks; if the applicant is self-employed with no employees, we suggest a 10-week period. The end-date will auto-fill.
Most of the information will fill in automatically, but you will have to note the number of employees at the time of the forgiveness application – for self-employed with no employees, the answer is 1.
For a self-employed person with no employees, the Amount of Loan Spent on Payroll Costs should be the full amount of the PPP loan.
Click the green “Next” button on the lower-right corner to continue.
A pop-up will come up – read and click “Accept & Continue” if you agree.
You should get a screen confirming the form was completed and letting you know they have sent an email with a link to Docusign the application. Do not click the “Continue” button until you sign the application. Open your email program in a separate tab to find the email from Biz2Credit Contract Support via Docusign, with the subject, “Biz2Credit : PPP Loan Forgiveness Application Form 3508S”. Keep in mind that it may be in the “Promotions” or “Updates” tab, or in Spam.
Click the orange “Review Document” button in the email.
The Docusign document should open in a separate tab – you may need to allow it to access your location.
Checkmark the agreement and click “Continue”.
Click the “Start” button and follow the guidelines to initial twice and then sign the form. Click the “Finish” button when you are done. Save a copy for your own records.
Go back to the Biz2Credit tab and click “Continue” (if you accidentally closed the tab, please go to the Biz2Credit site and log in again). It is essential that you click the “Continue” button to submit the application.
Click “Ok” on the pop-up. This will take you back to the dashboard – at the bottom, instead of the “Apply for Loan Forgiveness” button, you should see two links: View Submission and View Documents. There is no need to click on these at this point, but seeing them is reassurance that your application has in fact been submitted.
(If you did not download the form after Docusigning, then you can do it at this point, by clicking “View Documents”. It will then take you to a screen with a long list of possible documents – the top link (“E-signed 3508”) allows you to download a pdf of the e-signed document for your records.)
You will receive two more emails from Biz2Credit: 1) an email via Docusign allowing you to view or download the completed document (which at this point you’ve already done); and, 2) a confirmation that your loan forgiveness application is being sent to the SBA.
Now sit tight and await a confirmation email from Biz2Credit once the SBA has forgiven the loan – please make sure to forward this to your CPA firm… and congratulations!
Note: Even though no documentation for loans under $150k is required, occasionally there will be a follow-up email from Biz2Credit requesting certain items. Please forward to your CPA firm if this occurs and they will advise (and they’ll inform your Biz2Credit lending rep that this step should not be required).
For self-employed folks with no employees, the PPP Forgiveness process is very straightforward. Please let us know in the comments if you come across challenges, so others can learn from your experiences — especially for those who applied directly with Biz2Credit instead of through your CPA. Best of luck to you all!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
For over a year I’ve been answering the question, “when should we apply for PPP Loan Forgiveness?” And for over a year I’ve been responding, “not yet; there’s still so much that’s up in the air” — as AICPA (thankfully) recommended we wait for legislation from Congress as well as guidance from both the SBA and IRS.
Well, on June 24th, they gave us the green light in the AICPA Town Hall Series. Lisa Simpson said that if you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply.
This means that if you are a sole proprietor or partnership and have no employees, you are ready to apply — since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company. See my recent blog post for easy instructions.
It also means that if you have employees (or are an employee yourself), but you know that your company does not qualify for ERC, you are ready to apply. See below for less-than-easy but still DIY-worthy instructions.
For borrowers of more than $150k who had no wage or FTE reductions, or who qualify for a safe harbor/exemption:
As your loan was higher than $150k, you do not qualify to file the simplest PPP Forgiveness form (3508S). However, presuming you followed all the rules and had no reductions, you do qualify for the “EZ” form (3508EZ). Please make sure your lender allows you to use this approach. For reference, here is the forgiveness application form (pages 1-4) and instructions – but for the actual forgiveness process, instead of filling the form out, you will apply through your lender’s loan portal and it will walk you through the steps. Please carefully read through the checklist and instructions on pages 5-9.
Please also read through this Form 3508EZ Step-by-Step guide before beginning the process at your lender’s portal, as the questions you will be asked mirror the actual application.
Some important tips when going through the process:
Have your original PPP loan application and loan documents handy so you can make sure the info on your forgiveness application matches it exactly (legal name, DBA, address, NAICS code, EIN/SSN, loan number, number of employees at time of loan application).
Number of employees at time of loan application and forgiveness application are both simple head-counts, not FTEs or full- vs. part-time or anything else.
Covered Period is the date you received the funds through 24 weeks later, unless you determined a shorter period would be advantageous.
We recommend the “Amount of Loan Spent on Payroll Costs” total is not any higher than the minimum needed for forgiveness.
“Requested Loan Forgiveness Amount” should be the exact full total of your PPP Loan.
If you were unable to operate at full capacity, you may check the second box on the checklist, which means there is no requirement to fulfill the FTE (full-time equivalent) test.
Regarding backup documentation that you must submit with your application, keep in mind that what is considered acceptable support is up to each individual lender. – Payroll: your lender may ask you for bank account statements, payroll tax form 941s, and canceled checks for benefit invoices as proof of payment. – Nonpayroll: For rent/mortgage/utilities payments, your lender may ask for documentation that the obligation/services existed prior to 2/15/2020. They are likely to ask for proof of payment for all amounts claimed in this section.
If there is any concern that you might not have fulfilled the wage reduction or FTE tests, or that you do not meet a safe harbor or exemption for them, we strongly suggest working with a trusted advisor to prepare your PPP Forgiveness application, as it gets extremely complicated. Our approach, to be safe, has been to download the free Form 3508 PPP Forgiveness Calculator from the AICPA, regardless of which form you qualify to submit, so as to run all the numbers for the wage reduction test, and fill out the information to see if you are exempt from the FTE test or not. If you are not exempt, the AICPA also offers a free FTE calculator. We then suggest you retain these files as backup in case of audit, even if you end up passing all the tests and qualifying to submit a simpler form than the full 3508.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
For over a year I’ve been answering the question, “when should we apply for PPP Loan Forgiveness?” And for over a year I’ve been responding, “not yet; there’s still so much that’s up in the air” — as AICPA (thankfully) recommended we wait for legislation from Congress as well as guidance from both the SBA and IRS.
Well, on June 24th, they gave us the green light in the AICPA Town Hall Series. Lisa Simpson said that if you have worked out the interplay between PPP and the Employee Retention Credit (ERC), then you should go ahead and apply.
This means that if you are a sole proprietor or partnership and have no employees, you are ready to apply — since ERC is only an issue if you have W-2 employees or are a W-2 employee of your own company.
For borrowers of $150k or less who are self-employed with no employees:
For self-employed with no employees, it’s an “owner compensation replacement” approach, which means you will have 2.5 months’ worth of your 2019 net profit automatically forgiven. That is why the form is so simple. Your forgiveness amount should exactly equal your loan amount, presuming the original loan was calculated properly.
For reference, here is the forgiveness application form – but most lenders will have you actually apply through their own loan portal, which will walk you through the process. Just be clear that you are a self-employed individual with no employees, that your loan was $150k or less, and so you qualify for Form 3508S.
It should not matter how long you select for your covered period — anywhere between 8 and 24 weeks — but the first- and second-draws cannot overlap (your first loan covered period must be short enough that it ends before your second loan covered period starts).
You can indicate that you spent the entire loan on payroll.
Have your original PPP loan application and loan documents handy so you can make sure the info on your forgiveness application matches it exactly (legal name, DBA, address, NAICS code, EIN/SSN, loan number, number of employees at time of loan application).
And according to AICPA Funding Partner, Biz2Credit, on today’s July 1 webinar (from their PPP Forgiveness Required Documents Customer Guidebook):
(This had been the case for all the lenders I’ve seen so far, but the jury seemed to still be out for some of them, including Biz2Credit — so this was a relief.)
For self-employed folks with no employees, the PPP Forgiveness process should be very straightforward, from everything I’ve seen so far. Please let me know in the comments if you come across challenges, so others can learn from your experiences. Best of luck to you all!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Note to readers: the issue outlined below only applies to 50%-or-greater shareholders — which means the business is a corporation — and their spouses who work at the company. It does not apply to sole proprietors or partners — those two groups do not get paid via payroll and therefore are not eligible. Shareholders who own less than 50% are eligible if the business meets the other requirements to claim the credit.
If you are a 50%-or-greater shareholder and your company qualifies for the Employee Retention Credit for either 2020 or 2021, please read on.
I truly cannot believe that it’s June 2021 and I’m writing a blog post to help people choose the least-worst 2020 Employee Retention Credit interpretation — because even though the pandemic is starting to show in our rearview mirrors, we are still living in a universe totally devoid of IRS guidance on the topic of ERC shareholder eligibility. Accountants jokingly refer to this mystery as the Tax Advisers’ “Area 51” on #TaxTwitter.
What am I talking about? And why am I so annoyed? Let me set the scene:
3) Now that the first round of PPP loans are nearing the end of the payment deferment period — and to be fair, we’re also only a few months away from the tax return extension deadline — we would like to finalize those calculations and returns. (Reminder: there is no “deadline” for applying for PPP Forgiveness — per the SBA, “borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.”)
What’s that? You’re saying the IRS has still not issued essential guidance on a credit that was created in the first month of the pandemic? Yes. Yes, I am.
Recently, both the AICPA and Tony Nitti, two of my most trusted sources, have weighed in on this with a big “why is the IRS dragging their heels on this” reaction. Nitti went as far as to say, “Are wages paid to greater than 50% owners eligible for the credit? If I had a nickel for every time someone emailed me this question, I could afford to stop shamelessly and relentlessly shilling this newsletter. It is absolutely amazing that a full year after the ERC was created, we still don’t have a definitive answer.”
Okay, enough backstory. As a small business owner, what are your options? I call them Choice 1 (yes) and Choice 2 (no) for short:
#1 Calculate ERC as if owners are eligible and file 2020 income tax returns accordingly. This would result in a higher tax for clients (because more wages are disallowed as deductions). Submit PPP Forgiveness applications, but hold off on submitting ERC claims (941-Xs) until guidance is released. If guidance indicates that owners are eligible, file the ERC claims accordingly. If guidance says owners are not eligible, then amend the income tax returns and file the ERC claims accordingly.
This approach may make the most sense when there are two 50%-owners on payroll, and not many other other staff — as the increased credit would be worth the wait, compared to the total credit without owners.
#2 Calculate ERC as if owners are not eligible and file 2020 income tax returns accordingly. This would result in a lower tax for clients (because fewer wages are disallowed as deductions). Submit PPP Forgiveness applications, and submit ERC claims (941-Xs) — rather than holding off on these as in the above option. If guidance is eventually released that indicates owners are not eligible, then no action is needed. If guidance indicates that owners are eligible, then decide whether it is worth amending the income tax returns and ERC claims to get the additional funds.
This approach may make the most sense with only one 50%+ owner and many employees, as the cost to amend all returns and claims will probably not be worth the additional credit.
The goal with both approaches is to get PPP Forgiveness applications and tax returns filed as soon as possible, with the best balance between wage deductions and potential wage credits.
While I was tempted to pick one of these two approaches and inform all clients of our choice, I decided — especially with advice from an AICPA Town Hall — that this is a decision that each client needs to make for themselves. We’re happy to explain the potential costs and benefits of each approach and make a personal recommendation for each client’s individual situation, but the decision should be theirs. We recommend other CPA firms take a similar approach.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Many clients and colleagues have reached out to me over the past two months to ask whether they should apply for PPP1 forgiveness yet, and my answer (and that of the AICPA) is still “not quite yet”. But rather than just pushing off the question of “but when” into the future, I wanted to publicly share our company’s strategy and timeline for handling these applications.
The deadline to apply for Paycheck Protection Program (PPP) forgiveness is 10 months after the end of the covered period — which for most folks for the first round was 24-weeks — so that wouldn’t be until sometime in July 2021 for the earliest borrowers. (It’s not really a deadline, but it’s the date on which the lender will start requiring loan payments, so I think of it as one.)
We’re planning to dedicate May & June 2021 to working through all our existing clients’ PPP forgiveness applications. There are many clarifications we’re still waiting for (they keep dribbling out of Congress, IRS, and the SBA bit by bit, with occasional leaps), and the interaction between the PPP and other types of financial relief is complex.
An example of how the changing rules affect applications: the EIDL advance grant was previously supposed to be subtracted from PPP forgiveness; but by asking our clients to wait on their forgiveness applications, they were able to take advantage of a December 2020 change that removes this requirement, saving them many thousands of dollars. (Though thankfully, it sounds like SBA will eventually refund those amounts to businesses who applied before this new rule went into effect.)
As if these reasons weren’t enough, in a recent on-demand AICPA Town Hall, they mentioned that: – Most lenders are not actively taking forgiveness applications because their teams are focused on administering PPP2. – SBA is working very slowly on forgiveness process because they are also focused on PPP2. – The new simplified form for $150k and under will not be worked into the SBA system until sometime in March.
Between the constantly-changing rules for PPP and the guidance and calculations needed for ERC, we’re still following the recommendation of the AICPA and asking folks to hold off on PPP1 forgiveness applications, until tax season is behind us all and the IRS can focus on the remaining questions, allowing us to be methodical and consistent in our approach.
There’s no reason to be nervous about holding off on forgiveness — of the one-third of PPP loans that have been submitted for forgiveness, fully 99% of the loan dollars have been forgiven. The very small amount that have not are small loans at only 1% interest. Furthermore, by waiting you are giving your business the best chance at maximizing other types of financial relief, especially as the new Biden-Harris administration is in the process of changing rules to make them more attainable for a larger number of the smallest businesses out there, as well as Congress creating new funding opportunities.
(For tips on planning for the potential Employee Retention Credit, see my next blog post.)
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
This past Wednesday, February 17th 2021, I was honored once again to participate in State Representative Will Guzzardi’s FREE Facebook Live series designed to help his constituents — and anyone else who wants to tune in — to learn about financial relief during Covid-19.
The full-length webinar is FREE, as are the slides, resources and links to walk you through the application process. Additionally, a PDF version of the slides is available for download here:
We covered the following topics: 1) Paycheck Protection Program Summary 2) Current Program Overview 3) Eligibility 4) How To Apply 5) Where To Apply 6) Forgiveness Basics 7) Resources & Questions
Please share far and wide to help small business owners learn about the current status of the Paycheck Protection Program and how they can determine eligibility and apply for a non-taxable forgivable loan to help their companies stay afloat during these challenging times.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
For the past few weeks, we’ve been hearing in the news that Congress is coming closer to an agreement on another round of stimulus. It will be a more narrowly-targeted package than prior relief, but it will contain (at least the draft does) funding for the most important items: vaccine distribution; unemployment extension & federal supplement; stimulus checks; emergency food, rent & loan assistance; PPP loan forgiveness simplification; and our main topic here: another chance at PPP funding.
At this week’s AICPATown Hall (free recording here), Lisa Simpson and Mark Peterson walked us through what is included in the current round of proposed legislation, and what it would mean for the next PPP program (popularly dubbed “PPP2”). They have encouraged us to share their slides and other resources.
Some of the notable elements are that 501(c)(6) organizations — including Chambers of Commerce — will be eligible for PPP this time, providing their lobbying efforts don’t exceed a certain threshold (10% as of now but that could change); and hospitality-industry chains will yet again be allowed to each apply for PPP as if they were independent hotels and restaurants (surprising after the negative press from the first round, but they have a loud voice in politics). Thankfully, the IRS and Congressional representatives are working together to include a provision for expenses paid for with PPP funds to be deductible — the current biggest obstacle for small businesses who receive(d) aid.
In addition, Lisa went through what we know so far about how the new PPP program will be structured and what eligibility requirements might look like. Keep in mind that this is all in draft at this point.
The idea is that if the gross revenues for any quarter in 2020 are down 30% or more over the same quarter in 2019, the business would be eligible for a second application for PPP funds, as long as they have 300 or fewer employees (per location, if in the hospitality industry). EIDL and PPP funds would not be included in this calculation, but no word yet on whether other aid, such as state, local or industry grants, would.
You do not have to apply for forgiveness for PPP1 before applying for PPP2 — in fact, we are still recommending that you hold off on your forgiveness application until Congress passes forgiveness simplification and tax deductibility of related expenses.
Nothing has been finalized yet and we don’t know all the details. But the AICPA has been meeting with politicians on both sides of the aisle and says that something is certainly going to be passed — it’s just a question of when, not if — and what the exact details will be.
It’s likely we’ll have news soon, and as such, it’s important that small business owners begin anticipating their next decision here, since time will likely be a factor — there is less capital in PPP2 than there was in the first round (which was exhausted in 6 days), so being prepared is key.
With that in mind — tips to consider if you might want to pursue additional PPP funding:
1) Have your books up-to-date and reconciled so you and your accountant can begin preparing your application the second the legislation drops. 2) There will be an eligibility hurdle for second-time PPP applicants. You will need to prove a 30% (as of now) drop in revenue — not profit, but gross revenue — in any quarter of 2020 compared to the same quarter in 2019. (If you didn’t get PPP funds in the first round and you want to this time, this rule does not apply.) The first round of PPP/EIDL does not count toward income for this purpose. No word yet on whether other grants may. Otherwise the calculations will be the same as in the first round. 3) I’m asking my interested clients to reach out to me to get their file set up in my CPA Business Funding Portal now, before legislation is passed, so we can just hit “submit” when the program opens, to try to get them in the first tranche of applicants.
(Note to other CPAs and accounting colleagues: this time around I am using AICPA-developed PPP application and forgiveness software, CPALoanPortal.com, so as to make the process for getting client funding less haphazard, more reliable, and more efficient. It’s free at the basic level, which allows you to apply for funding and forgiveness all in one portal, with a client dashboard. I’ve decided to pay to upgrade so I can use the payroll company reporting and AICPA FTE-calculator integrations. Their partner, Biz2Credit, was directly approved by SBA to lend money to small businesses; it’s not a third-party (like so many of the services we used first-time around who brokered loans as a middle-man). Looking forward to same-day PPP2 loan approvals, and disbursements within days. No I am not paid a cent to say any of this.)
Sincerely hoping the process goes more smoothly this time than it did in April!
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In an effort to push Congress into action, the IRS reiterated its stance on the PPP last week.
Late last week, the IRS and Treasury issued both a revenue ruling and a revenue procedure, doubling down on their stance that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.
This isn’t new news, of course. The IRS is bound to statute on this one and doesn’t have any wiggle room — only Congress can legislate on the topic of what is taxable and deductible, whereas the IRS only has administrative oversight in this arena. They made it clear very early in the game — April 30th, in fact — that they had no intention of accepting deductions for expenses that were paid for with PPP funds.
But in the ensuing months, Congress — despite broad bipartisan support for a measure to render these costs deductible — has been stuck in gridlock and failed to pass legislation making it so. This recent action on the part of the IRS seems designed to signal Congress that only by their action will the original intent of the CARES Act be realized.
However, the IRS took this particular set of guidance one unfortunate step further, at least as far as my clients are concerned.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”
Now, I have been attending the AICPA Town Halls since nearly the beginning of the pandemic, and they are still strongly recommending that no one apply for forgiveness before year-end unless: 1) they need to sell their business; 2) loan covenants are at risk; or, 3) they need to reduce FTEs after meeting a date-driven safe harbor.
Part of the reason for this suggested delay is the aforementioned statutory requirement that prohibits the IRS from permitting any deductions for expenses paid for with non-taxable income. (Also: likeliness of legislation authorizing automatic forgiveness under a certain threshold; and the need for further guidance in many areas that remain unanswered.)
The idea was that if forgiveness was not granted in 2020, then the deductions could be made as usual on tax returns filed in the first-half of 2021. When forgiveness was eventually granted on these PPP loans, one of two things would have happened: 1) Congress would since have acted to protect the deductions and therefore PPP funds could be accepted into non-taxable income; or, 2) Congress would not have acted, in which case the PPP income would effectively be made taxable in 2021.
To me, whether the expenses paid with PPP proceeds were deductible hinged on whether forgiveness was obtained; as a result, I strongly maintained that those expenses did NOT become nondeductible until that “condition subsequent” occurred. As a result, if a business were filing its 2020 tax return before word on its forgiveness application had come down from the SBA, the expenses would be fully deductible. After all, we have a little something called the “tax benefit” rule, which allows a taxpayer a full deduction if at the time of filing the return, no event has occurred to render the amount nondeductible. Then, if a future event occurs that is fundamentally inconsistent with the premise on which the previous deduction was based (for example, an unforeseen refund of deducted expenses, or in this case, the forgiveness of a loan), the taxpayer must take the deducted amount into income. Applying the principles of Section 111 to PPP loans, the taxpayer would be entitled to a full deduction in 2020, with a potential income pick-up in 2021 when the loan was forgiven.
But with this recent IRS guidance, as Tony points out — he was wrong (again).
According to the Ruling, it matters not whether the application for forgiveness has been filed by the time the tax return is ready to go; rather, what matters is that the taxpayer apparently knows, in their heart of hearts, that the loan will ultimately be forgiven. After all, as the Ruling explains, “Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients… with clear and readily accessible guidance to apply for and receive covered loan forgiveness,” a sentence which I would have found laughable had the lies contained within it not ruined the past six months of my life.
I won’t get into the details of what it means to “reasonably expect” forgiveness, or determine partial forgiveness, or whether or not the new safe harbor applies if you “reasonably expect” wrong. (I’ll let Alan Gassman, another fan of Tony’s, dive into those weeds.) But as a short summary: 1) You can deduct expenses on your 2020 return if you find out before the return is filed that the PPP loan didn’t get forgiven or if you decide not to apply for forgiveness; 2) If you guessed wrong about the amount of forgiveness (and therefore deductions), you can either a) amend the 2020 return to adjust the disallowance, or b) deduct the improperly disallowed expenses for 2020 in the year forgiveness is determined.
Somehow, with not only a revenue procedure but also a revenue ruling, the IRS managed not to address two big issues that their rulings raise: 1) How should a Schedule C filer handle the deduction question? For a self-employed person, it’s not the expenses that determine forgiveness, but rather a calculation based on their 2019 income. 2) Which deductions will be limited, and in what order (payroll, rent, mortgage interest, utilities)? This has serious ramifications for the §199A Qualified Business Income deduction, Research & Development credits, and the §163(j) Interest Deduction limitation.
But I am not even going to touch on those two issues. Why? Because I truly believe the IRS made this announcement to rile up Congress members into finally taking action. It might have worked.
The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.
In the meantime… as an accountant, what do you tell your clients? As a small business owner, what do you do?
Well, if I’m right, and Congress is duly riled, then hopefully we’ll finally see some movement here, preferably before the end of the year, but (dear lord please) at least before tax season. At which point — poof — it becomes a non-issue (with the exception of the countless hours I and others have spent worrying and writing about it).
Tax Filing Approaches for Consideration 1) Wait and see • Use extensions until additional guidance or legislation is available • Pass-through entities don’t need to be concerned until March/April 2021 deadlines 2) File return and pay taxes • Assumes expenses paid with PPP funds will not be tax deductible • If this changes, the borrower can file an amended return 3) File return and deduct expenses** • Contrary to current guidance (but in the spirit of the PPP legislation)
For what it’s worth, Bill describes himself as a “wait and see” kind of guy. (I strongly suggest watching Bill’s participation in the most recent AICPA Town Hall — from 32:00 through 52:40. His logical process, description of history and legislative intent, and arguments are thought-provoking.)
I’ve already spoken with my tax partner, and our plan is to put all partnership and corporate clients on extension to avoid the unnecessary cost of approach #2 and the unnecessary risk of approach #3. Haven’t yet decided how to handle Schedule C self-employed filers… but also hoping we won’t have to cross that bridge.
In the meantime, it’s business as usual, trying to close out books and prepare for 1099s… as if it were any other pandemic year-end.
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In today’s AICPA Town Hall, they reviewed the reasons a business might decide to apply for PPP forgiveness now — even though we have been consistently recommending to loan recipients that they wait until there’s movement from Congress on an automatic or streamlined forgiveness program (and continue to do so).
Basically, unless you are: 1) selling your company; or, 2) potentially violating loan covenants because of the PPP being represented as a liability; or, 3) needing to lay off staff after meeting FTE reduction requirements; …you should still hold off on applying for forgiveness.
However, if you are in one of the groups above, then consider the AICPA‘s list of “Factors impacting timing of forgiveness application”: • Has the borrower spent the full amount of PPP funds? • Is borrower trying to sell the business? See Oct. 2 SBA Procedural Notice • Is the loan under/over the $150k dollar amount of potential threshold for simplified forgiveness in Congress? (New form for <$50K) • Has tax planning around timing of deductibility of expenses paid with PPP funds been considered? See Aug. 20 discussion with Ed Karl (AICPA VP of Tax) • Does the borrower need to make business operating decisions that may include FTE reductions? (See AICPA FAQ #10, below) • Does borrower want to get PPP debt off the books? Are there loan covenants to consider? • Is the lender even accepting applications?
It’s important to weigh all of these criteria before making the decision to apply for forgiveness.
And for reference, here’s AICPA FAQ #10: If a borrower applies for forgiveness before the end of the covered period, how does the FTE reduction safe harbor work in operation?
The instructions for the Form 3508 forgiveness application indicate that the borrower includes the number of FTEs at the end of the covered period OR the date the application is submitted. The SBA has provided information to lenders as follows: “When a borrower submits the completed application and a lender has processed the borrower’s forgiveness application, the borrower is no longer bound to the FTE restrictions. The covered period ends when the borrower successfully applies for forgiveness.”
To summarize: we still recommend, as does the AICPA, that unless you fall into one of the groups above, you hold off on forgiveness applications for now. Work with your CPA to run the numbers to make sure you meet the requirements as they currently stand — knowing they might get easier, but protecting yourself if they don’t — but hold off on the actual application until Congress takes some action, which will be coming eventually… it’s a question of “if”, not “when”.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
