Recent guidance from the Small Business Administration (SBA) clarifies that Paycheck Protection Program (PPP) loan forgiveness applications will not be due by October 31 as early forgiveness application forms had indicated.

Timing of forgiveness applications is critical because the SBA measures the organization’s employee headcount to evaluate forgiveness on the application date. Originally, the loan forgiveness application forms indicated there was an Oct. 31, 2020 expiration date, but in a recent addition to the SBA’s frequently asked questions document, it clarified that borrowers may submit a loan forgiveness application any time before the maturity date of the loan. The PPP loans generally have a two or five year maturity date from origination based on loan structure. Loan payments are still deferred only until 10 months after the last day of the loan forgiveness covered period, however, so applicants are encouraged to apply for forgiveness much earlier than the maturity date. Unforgiven portions of the loans will accrue interest at 1% and may also be subject to tax restrictions.   

Quick Recap of Where We are with the PPP

The Paycheck Protection Program (PPP), which came about as part of the CARES Act, enables organizations to use the SBA’s small business lending program to receive loans of up to $10 million to use toward employee payroll (at least 60%) and other administrative expenses to help prevent organizations from having to furlough or lay off employees.

Simplifying the forgiveness application process is part of ongoing clarification from the SBA. For companies that borrowed $50,000 or less, there are now de minimis exemptions regarding the full-time equivalent (FTE) employee reduction penalty and the employee salary and wages reduction penalty. This should decrease the administrative burden on lenders who must process and submit the applications to the SBA, something that has been a large concern.

Items to Watch: Forgiveness and Tax Liabilities

The SBA stopped accepting PPP loan applications on Aug. 8, 2020, with almost $134 billion of Congressionally approved funds remaining unspent. Allowing certain small businesses to access those funds is among several PPP proposals being discussed as Congress and the Trump administration continue to discuss another comprehensive COVID-19-related stimulus bill.  Since these funds were already approved but unused, it would be easy to redirect them into new PPP loans without requiring Congressional approval.

Other components of the process remain vague as well. For example, it is still unclear to what extent lenders are responsible for verifying loan forgiveness application information or if they should be relying on descriptions of financials to count towards qualification. Organizations seeking loan forgiveness must have their bank or lender that facilitated the loan submit the forgiveness application and supporting documentation through an SBA portal, and then the SBA either accepts or denies the portion of the loan to be forgiven.  The banks and lenders have up to 60 days to perform their review before submitting to the SBA. Once the SBA receives the PPP loan forgiveness application package, it has up to 90 days to review and approve PPP loan forgiveness.

Many lenders have not been submitting forgiveness applications even though the SBA portal is open because there are many questions about qualifications and details related to repayment as well as program eligibility and possible extensions in the next round of stimulus.

Another PPP loan issue that has still not been resolved involves taxes. If the loans are forgiven, the forgiven amounts also are not taxable income. However, expenses paid out of PPP loan proceeds are not tax deductible if the loan proceeds are forgiven. Absent Congressional action, expenses paid from forgiven portions of PPP loans are not tax deductible, which could leave PPP loan recipients with a higher tax bill than anticipated for 2020. There needs to be coordination and joint guidance issued from the U.S. Treasury, Internal Revenue Service and the SBA to resolve these open issues.

Questions Concerning Thresholds

The SBA offers no guarantee about whether small loan recipients will have an automatic process for forgiveness. Continued support from Congress in the next stimulus bill may include enhanced guidance as well as a more streamlined loan forgiveness application process and possible loosening of guidelines or automatic forgiveness for PPP loans of $150,000 or less.

If you have fully utilized the PPP funds then you may want to submit for forgiveness as soon as possible if you have staffed operations sufficiently. Otherwise, you will be penalized for future staff reductions if layoffs will be an eventuality.  There is also the safe harbor date of Dec. 31, 2020 to bring back employees to the necessary FTE levels to avoid penalty.

For more information, please contact a member of our COVID-19 loan and capital assistance team.

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