PPP Loan Forgiveness Applications: What We Know Now

This blog was originally published on December 17, 2020. It was updated on January 6, 2021.

If your business received a Paycheck Protection Program (PPP) loan, you may be wondering when is the right time to submit your forgiveness application, what is required, and what the process entails. While the U.S. Small Business Administration (SBA) is still working out final details, you should contact your advisors so you can be ready to start the process.

Many lenders have started accepting PPP loan forgiveness applications, but not all. The first step borrowers should take is to contact the lender that issued their loan and learn when their application period begins and what will be required of them.

Here is what we know so far:

Borrowers who received more than $2 million need to complete a Loan Necessity Questionnaire.

The SBA recently provided lenders with a Loan Necessity Questionnaire to be completed by borrowers who received $2 million or more in a single loan or aggregate loans (if you own more than one business and received PPP funds for multiple entities, the SBA will aggregate the total amount of all loans to determine whether you reached the $2 million threshold.)

The Loan Necessity Questionnaire is a lengthy document containing several questions covering many aspects of your business, such as:

• Revenue comparisons between Q2 2019 and Q2 2020
• Whether you had any employees making more than $200,000 (on an annual basis) under the covered period
• Whether you made any distributions to owners; this includes equity in stocks and capital distributions
• The amount of cash you had on hand before you applied for the PPP loan
• Whether you began any capital improvement projects during the covered period

After a business submits the questionnaire, it’s possible the SBA could determine that the company did not truly need the loan, and therefore may not be eligible for forgiveness. This could especially impact medium and large companies, some of whom might not have applied for the PPP loan or may have made different business decisions surrounding staffing, etc., if they would have known they would have to pay back the full amount. If a company is determined to be ineligible for forgiveness, there is a silver lining: PPP loans have a relatively low interest rate.

There are three different forgiveness application forms.

You will need to consult with your lender and accounting professional about which is the right form to complete. Borrowers who received $150,000 or less in PPP funds will have a streamlined form requiring less information regarding their full-time employees or full-time-equivalent employees (FTEs.)

All other borrowers will need to complete one of these forms:

• SBA Form 3508 EZ does not take loan amount into account but does require that borrowers meet certain criteria to use this form. For example, one factor is whether the business was shut down due to a government mandate. This likely applies to hospitality businesses (restaurants, bars, hotels, etc.), gyms and fitness centers, day-care centers, and some medical practices, such as those who perform elective procedures.
• SBA Form 3508 is the standard form all others will complete, who did not meet the criteria or requirements of the other two forms.

Rental and mortgage interest payments may be forgiven, with exceptions.

Rental payments and mortgage interest payments can be included within the forgiven amount of the loan, with an important exception: rental payments made to a related party.

On August 24, 2020, the SBA released a new Interim Final Rule (IFR) limiting the forgivable portion of related party rent expense to the amount of mortgage interest paid or incurred on the property during the covered period allocated to the space being rented by the borrower. The IFR defined a related party as any ownership in common between the borrower and the property owner.

The timing of loan forgiveness applications depends on individual facts and circumstances.

Talk with your tax and financial advisors about the best PPP forgiveness strategy for your business. Some businesses should apply for loan forgiveness as soon as they’ve spent the funds. Others may benefit from waiting for more clarification on forgiveness, either from their lender, from the SBA, or from Congress. The SBA maintains a current FAQ on PPP loan forgiveness.

The new Loan Necessity Questionnaire is an example of how much and how quickly things are changing. Many lenders are also making updates to their online client portals to account for changes and new guidance. Staying in contact with your lender and advisors will help you stay up to date.

You should start considering the tax consequences of your loans.

While we are still waiting on further guidance from the IRS on the true impact of PPP loans on 2020 taxes, you should begin the conversation with your tax advisor as soon as possible. There is also a possibility that the new administration could pass additional relief packages, extend certain temporary provisions of the CARES Act, or make other changes that could impact your tax returns this year.

If your loan qualifies for full or partial forgiveness, the forgiven amount should be recognized as revenue on your financial statements once it is forgiven. Perhaps the most important tax planning consideration for PPP loans is forgiveness.

From a tax standpoint, as it stands right now, PPP loans that are forgiven will not count as taxable income. However, Congress has now clarified their position that borrowers may deduct expenses paid with PPP funds. This is a long-awaited clarification that aims to further assist businesses in the wake of the pandemic.

Whether or not your lender has begun processing forgiveness applications, having all the necessary documentation ready on your end will help expedite the process. Accounting professionals and other financial advisors can help you understand what is required, gather the necessary information and documents, and help you submit your forgiveness application.

If you need assistance with PPP loan forgiveness applications or have questions about the process, please reach out to your Kaufman Rossin relationship team leader.