By: Elikem Tsikata
On March 27, 2020, Congress signed into law the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act has since allocated over $500 billion to the PPP and lending institutions. The Small Business Administration’s (SBA) loan program was created to provide relief for U.S. businesses impacted by COVID-19. These loans allow a business owner to continue to pay workers and cover essential costs disrupted by the pandemic.
The CARES Act also allows for business owners to have their loans forgiven through PPP Loan Forgiveness. The program’s general premise is that PPP borrowers (the business) will be eligible for loan forgiveness if the allocated 
funds are used for payroll costs, business mortgage payments, rent, utilities, and other pre-determined business expenses. If approved for forgiveness and executed properly, the PPP loan is converted into a grant for the borrower, with the potential to be fully forgiven.
While millions of U.S. businesses have applied and been approved for PPP loan forgiveness, many potential borrowers remain skittish on the program and its tax implications. This article aims to explain some of the basic guidelines of the PPP loan process, as well as the potential tax implications for borrowers who seek loan forgiveness.
General loan process
The PPP loan process can be outlined as follows:
- The borrower business submits a PPP loan application to its lender institution.
- The lender evaluates the loan application for accuracy before submitting it to the SBA.
- The SBA determines whether the loans will be forgiven and whether the full amount of funds will be allocated or just a portion of the funds.
- The SBA sends the lender the funds. Funds that are considered unforgiven parts of the loan will have a 1% interest rate over time. How much time the borrower will have before the interest rate is dependent on when the loan was accepted.
rough timeline
It’s crucial for a potential borrower to understand the general timetable for the PPP loan process. Once the lender receives an application, they have 60 days to issue a decision to the SBA. Once the SBA does its review, it will provide the funds to the lender, specifically within 90 days of the receipt of the lender’s decision.
Borrowers may submit a loan application any time before the maturity date of the loan. Loans issued prior to June 5 of this year have a maturity of 2 years, while loans issued after have a maturity rate of 5 years.
Loan proceeds must be spent during the 24-week (168-day) period immediately following disbursement of the loan, or by December 31, 2020, whichever is earlier (the Covered Period). Borrowers who received their PPP loan before June 5 could elect to use an 8-week (56-day) Covered Period.
payroll v. non-payroll cost rules
Businesses can use PPP loans for payroll and specified non-payroll costs. These include mortgage interest, rent, utility payments, or interest on the debt. All non-payroll costs applied must have incurred or begun before February 15, 2020. An eligible non-payroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. When considering these rules for the purposes of loan forgiveness, the golden rule is that a minimum of 60% of the forgiveness amount has to be for payroll costs. Consequently, a borrower cannot allocate more than 40% of the forgiveness amount to those non-payroll costs.
ppp loan forgiveness applications
There are 3 application forms borrowers may use in their PPP loan forgiveness request. The table below explains the differences between forms:
| Form Type | Who Can Use? | Sections |
| Form 3508 | Any PPP borrowers | Calculation form
Signature/authorization form
Schedule A
Schedule A worksheet
Demographic information form (optional) |
| Form 3508S | PPP borrowers applying for forgiveness on PPP loans with a total loan amount of $50,000 or less | Signature/authorization form
Demographic information form (optional) |
| Form 3508 EZ | PPP borrowers who are self-employed or have no employees
Borrowers who did not reduce employee levels, wages, or hours |
Calculation form
Signature/authorization form
Demographic information form (optional) |
loan forgiveness: Tax implications
The initial PPP guidance communicated that PPP loan forgiveness may be excluded from gross income by an eligible recipient. In April, the IRS contradicted this premise in Notice 2020-32, which stated that expenses associated with the tax-free income are nondeductible. In other words, business owners cannot receive deductions for an expense that would otherwise be deductible if the payment of the expense results in forgiveness of a covered loan, or if the income associated with the forgiveness is excluded from gross income.
Current IRS guidance has both confused the issue and put the business owner in a tough spot. The potential borrower risks facing potential penalties should they take the deductions now and the loan forgiveness is granted later. The IRS guidance means businesses could exclude forgiven disbursements from gross income but be barred from deducting such expenses for federal income tax purposes.
advice from a professional
I had the pleasure of speaking with Adam Markowitz, Vice President of Howard L Markowitz PA CPA, regarding PPP loan forgiveness and IRS Guidance. Adam has over 13 years of accounting experience and was kind enough to talk through some of the recent changes.
We first discussed the recent guidance from the IRS issued on November 17: Revenue Procedure 2020-51 and Revenue Ruling 2020-27. Overall, both issuances re-affirm that because borrowers are not taxed on the proceeds of a forgiven PPP loan, the expenses related are not deductible.
I asked Adam what his advice to potential PPP borrowers would be. He had a swift and pragmatic response:
“Wait.”
Adam explained that those who apply now are looking at a 10-month timetable from coverage to apply. He believes most banks aren’t fully ready to take on even more applications and that the current system is backlogged. Adam also raised skepticism on the SBA’s long-term ability to enforce these loan approvals. Noting the disparity between IRS resources, he said the SBA’s power is marginal in comparison. Finally, Adam emphasized the great costs and paperwork associated with the current system of PPP loans.
“It will get easier at some point. But right now, I’d tell a business owner to wait for more government guidance and don’t feel like they have to rush.”
further guidance and resources
The SBA, Department of Treasury, and financial institutions have made efforts to clarify PPP loan forgiveness confusion. Below are some of the more useful resources available to borrowers and lenders:
- Department of Treasury Resources Page
- S. Chamber of Commerce: Guide to PPP Loan Forgiveness
- Small Business Administration: Frequently Asked Questions (FAQs) on PPP Loan Forgiveness
- IRS: Information Reporting Requirements
Overall, small business owners still considering a PPP loan must consider the financial and tax implications associated with it. It is strongly recommended that a potential borrower speak with a financial advisor or lending institution to make sure the loan is something advantageous to their particular situation.
Elikem Tsikata, at the time of this post, is a third-year law student at Penn State Dickinson Law. He is a Ghanaian-American from McLean, Virginia, and a graduate of Miami University (OH). Elikem is pursuing a certificate in Entrepreneurship Law with a Transactional concentration. Elikem serves as President of Dickinson Law’s Student Bar Association. He is also a Research Assistant to Professor Samantha Prince.
Sources:
https://www.schwabe.com/newsroom-publications-a-guide-to-the-sba-ppp-loan-forgiveness-review-process
https://www.schwabe.com/newsroom-publications-key-considerations-for-ppp-documentation
https://www.patriotsoftware.com/blog/accounting/ppp-forgiveness-calculation/
https://www.irs.gov/pub/irs-drop/n-20-32.pdf
https://www.markowitzaccounting.com/
https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
Photo Sources:
https://evcpa.com/shoud-i-be-applying-for-ppp-loan-forgiveness/
https://www.marinerwealthadvisors.com/insights/how-are-your-finances-affected-by-the-cares-act/
https://www.kservicing.com/ppp-loan-forgiveness/
https://www.consumerfinance.gov/about-us/blog/help-small-businesses-during-covid-19-pandemic/
