Should I Apply Now for PPP Loan Forgiveness?

Editor’s Note: Thank you for viewing this resource about the Paycheck Protection Program (PPP). This was a cornerstone for many organizations during the COVID-19 pandemic, but it’s important to stay current on the latest financial support options. Like PPP, the Employee Retention Credit (ERC) can be leveraged to bring your business significant financial relief.

We invite you to dive into our ERC content here. Need professional advice on maximizing your ERC benefits? Learn more about our Employee Retention Credit consulting services and then contact us.

That is the question on the minds of over 5.2 million U.S. business owners.  The answer, as with so many similar situations is, “It depends.”  By law, borrowers have up to 10 months following the end of their covered loan period to apply, which in even the earliest loan recipients’ cases would give them until late July or early August of 2021.  However, there are a variety of factors impacting the decision of when to apply for loan forgiveness.  Such variables include the size of the loan, the lender’s readiness to accept applications, the payroll provider’s ability to produce adequate supporting documentation, and whether there are extenuating circumstances relating to the borrower.

Let’s start with the last factor first.  If you are planning on selling your business, you may have an incentive to apply for forgiveness immediately to get the loan off your books prior to the sale.  Debt aversion or “To-do list anxiety” may be other reasons to act quickly – there are many people who just don’t want debt on their books if they don’t have to, or don’t like the idea of having a task on their list for nearly a year if they can cross it off now.  This is a personal preference that would have to be weighed against the potential benefits of waiting longer.

The size of the loan is an important factor.  Loans of up to $50,000 make up nearly 69% of the 5.2 million PPP loans made in 2020.  Borrowers of such loans are now eligible to use Form 3508S, which exempts these businesses from reductions in loan forgiveness amounts based on FTE or salary/wage reductions.  In addition, the form does not require borrowers to show the calculations used to determine their loan forgiveness amount.  Form 3508S is a simple one-page application (plus the optional demographic information page) requiring general information about the company and the loan, and certifications that the borrower “played by the rules” with regard to the use of the loan proceeds.  In most cases, these borrowers are sole proprietors or small companies with little or no support staff. If a borrower is eligible to file Form 3508S, they should do so whenever they want within the ten-month window.

Borrowers who may have the most incentive to wait are those with loan amounts between $50,000 and $150,000.  This subset comprises nearly one million PPP loans (just under 20% of the total).  There are currently two bills in Congress (H.R.7777 and S.4117), both introduced last summer, that call for “automatic” forgiveness of PPP loans up to $150,000, similar to the treatment loans up to $50,000 currently receive.  One of these bills may pass as part of a larger stimulus package over the coming weeks or months.  Business owners with loans in this range may be wise to wait for additional guidance rather than pay consulting fees to assist them with the current forgiveness applications, an exercise that may prove moot later.

Another consideration for the remaining 12.5% of borrowers with loans greater than $150,000 (about 650,000 of them) is their lender’s readiness to accept forgiveness applications.  While it seems most lenders are now accepting applications, they may only be accepting them for loans up to a certain size.  Even if they are accepting all applications, that does not necessarily mean they are “ready” to do so.  It may be prudent to allow some time for the banks to work through a substantial number of applications before applying for forgiveness.  Borrowers should consult with their bank to determine the lender’s current situation.

A related issue is the adequacy of reports currently being generated by the borrower’s payroll service provider.  The borrower should check with their provider to see if they can produce the necessary covered period payroll reports, with proper limitations on owner-employees and highly compensated individuals (those over $100,000 annual salary), as well as the FTE calculations for the covered period and the two base reference periods (1/1/20-2/29/20 and 2/15/19-6/30/19).  If they cannot produce adequate reports at this time, are they working to improve their reporting capabilities to alleviate this burden from the borrowers?  As with the banks, borrowers should discuss the current and future reporting status relating to PPP forgiveness calculations with their payroll service providers.

Borrowers with original PPP loan amounts of $2 million or more will need to complete SBA’s Loan Necessity Questionnaire – Form 3509 or 3510 (for non-profits) – as part of their forgiveness application process.  SBA is currently getting considerable pushback on these forms, as they request company financial information for periods of time after receipt of the PPP loan, while the loan application related to “economic uncertainty” at the time the company originally applied for the loan.  While these forms are not specifically designed to disallow loan forgiveness using 20/20 hindsight, recipients of such large loans may want to wait and see what develops with these forms over the next several weeks before applying for forgiveness.

With the IRS issuance of Revenue Ruling 2020-27 last month, which precludes deducting expenses paid with PPP Loan proceeds if there is a “reasonable expectation” of loan forgiveness, waiting until 2021 to apply for loan forgiveness in order to take the tax deductions in 2020 is no longer a valid reason to delay the application process.

However, another round of PPP Loans in a future stimulus deal may be a reason to wait if the borrower anticipates participating in such a program.  A second wave of PPP loans may be connected in some way to the first loans taken, in which case it would behoove a borrower to delay their forgiveness application for now.

There is no penalty for waiting to apply for PPP loan forgiveness.  The American Institute of CPA’s continues to advocate exercising patience in this process, as we all wait to see how things play out in Congress and with the new administration.

How Can KatzAbosch Help?

Each borrower has their own individual set of circumstances, and the answers are not always clear. If you have questions about PPP consulting services, please reach out to your KatzAbosch representative.