Many businesses are just starting the process of submitting applications for the Paycheck Protection Program (PPP) loan forgiveness. Meanwhile, the Small Business Administration (SBA), in consultation with the Treasury Department, is continuing to release additional guidance on the PPP loan forgiveness process. This new guidance may change the process for some and certainly impacts 2020 tax planning for all borrowers seeking forgiveness.
New Guidance on Expense Deductibility
Just this week, the Internal Revenue Service (IRS) announced new a procedure and ruling (RP-20-51 and RR-20-27) to clarify deductibility of expenses for pending PPP claims. This guidance makes it clear that PPP related expenses are not deductible even if the amount has not yet been forgiven so long as forgiveness is anticipated. In fact, to deduct expenses in totality for the 2020 tax year, taxpayers will be required to include an election statement with their tax filing claiming that the expenses do not qualify for forgiveness, or that the business has not nor will apply for PPP loan forgiveness.
Application Changes: Which Version of PPP Loan Forgiveness Application to Choose?
Borrowers seeking forgiveness must apply for forgiveness through their lender and provide supporting documentation. There are currently three versions of the Form 3508. Selecting the proper form depends on how much was borrowed and whether the business had any reductions in salaries or staffing during the covered period.
Form 3508S – Businesses with PPP Loans of $50,000 or less
This form is the simplest PPP loan application and is available for borrowers who received PPP loans of up to $50,000. Form 3508S requires the least amount of calculations and documentation. Also, those who qualify for this form will not have forgiveness reduced by any decreases in employees or wages during the covered period. Keep in mind that if the business has affiliates and the PPP loan total across all affiliates is over $2 million, the business will need to use the 3508EZ or 3508 forms.
Form 3508EZ – Businesses with PPP Loans over $50,000 Meeting Certain Criteria
This form requires borrowers to calculate payroll and nonpayroll costs but does not require adjustments for employee or wage reductions. This form is available to borrowers that can satisfy at least one of the following conditions:
- The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application.
- The borrower did not reduce the salary or wages of any employee by more than 25% AND did not reduce the number of employees or the average paid hours of employees.
- The borrower did not reduce the salary or wages of any employee by more than 25% AND was unable to operate as normal due to COVID-19 health guidance compliance.
Form 3508 – All other Businesses with PPP Loans
This form is the most complex and should only be used for businesses that do not qualify to use one of the simpler options. Payroll calculations and nonpayroll costs are required and borrowers who reduce their full-time equivalent employees, employee salaries, or both also reduce their PPP forgiveness amount. Included within the form is the calculation to determine how much your loan forgiveness amount will be reduced.
What Supporting Documents are Required for PPP Loans?
Regardless of the form used, lenders will require documentation verifying compensation payments and nonpayroll costs. All documents, including documentation supporting any certifications made by the borrower on the initial loan application or on the forgiveness application, should be retained for six years after the date the loan is forgiven or repaid in full. Supporting documentation includes:
- Bank statements
- Third-party payroll service reports
- Tax forms
- Payment receipts, cancelled checks, or account statements.
- Amortization schedule and receipts for business mortgage interest payments.
- Lease agreement and receipts for business rent or lease payments.
- Invoices and receipts for all utility payments.
Earlier this month, the SBA issued additional requirements for PPP borrowers seeking forgiveness on loans over $2 million. For-profit borrowers above the threshold will need to complete Form 3509 PPP Loan Necessity Questionnaire to support their good-faith certification that economic uncertainty made their loan request necessary for ongoing operations. A similar questionnaire (Form 3510) is also required for Non-profit organizations exceeding this loan limit. When applicable, these forms will be sent to borrowers directly from the lender.
When to Submit Forgiveness Application?
Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from the loan’s origination, depending on the borrower’s agreement. The loan payments, however, are deferred only until 10 months after the last day of each borrower’s loan forgiveness covered period.
HSC is here to Help!
New developments relating to the PPP Loan forgiveness process continue to emerge with more to certainly come. For instance, there is legislation currently introduced that may change the deductibility of expenses and potential for new rounds of funding as COVID stimulus negotiations move forward. Our HSC team is here to help your business navigate this changing landscape and prepare for the tax impact of the Paycheck Protection Program. Please contact your HSC advisor to start planning today!