When Should I File for PPP Loan Forgiveness?
The case for asking for forgiveness…next year
Over the past few months, many business clients have asked when they should submit their application for forgiveness of the PPP loan. Ordinarily, the answer would be easy, “the sooner, the better.” But, like all things in 2020 – it’s complicated.
We believe that it may be better for most clients to wait until 2021 to apply for PPP loan forgiveness.
There are several reasons for this:
- No borrower is specifically required to apply for forgiveness in 2020; the 10-month deferral deadline in HR 7010 pushed the requirement to begin making payments to 10 months after the end of the 8-week or 24-week Covered Period. In all cases, this is in 2021, not 2020;
- The current threshold for automatic forgiveness is $50,000, but there are bills in Congress with a lot of support that increases the automatic forgiveness threshold to $150,000. Automatic forgiveness = far less paperwork for business owners;
- The IRS has published a notice that while the forgiven debt is not taxable income to the borrower, the deductions (payroll, rent, etc.) that qualified as Covered Expenses are not deductible. From a practical perspective, this really means that the canceled debt is taxable to the borrower. Why pay tax on the canceled debt in 2020 if you can defer it to 2021?
- There is a push from Senators like Marco Rubio to pass a bill that not only makes the canceled debt income non-taxable but also allows businesses to deduct the Covered Expenses. This would be awesome for business owners, but the current Congressional quagmire means it is highly unlikely to happen in 2020. Therefore, there could be a substantial benefit for waiting until 2021 to apply for forgiveness.
I’m not the only one who is a proponent of waiting.
There are a few reasons that some of you may not want to wait for forgiveness. Reasons could include:
• You have a loss in 2020 and you’d rather absorb the cancelation of debt income in 2020. I can buy that, especially if you’re making your financial statements appear to have less of a loss. But remember that losses can be carried back and forward, so the tax effect is likely to be about the same;
• You are wary of higher tax rates in 2021. Valid concern and always a potential downside of deferring income to future years;
• You don’t want to show the debt on your business’ balance sheet. Again, a valid concern. That said, most lenders are aware of the PPP loan and know it will be forgiven, so they won’t see it as a negative on your financial statements;
• You just want to be done with the PPP! We can identify! Tembo also wants to be DONE with the PPP!