Now that Congress has finally acted, we do have some more clarity (and a new opportunity). Also, with the end of the year approaching, here are a few things to keep in mind as you consider your tax planning options for 2020 and 2021. [One caveat: The law does not become effective until actually signed by the President; however that is expected].
Paycheck Protection Program Forgiveness
PPP borrowers may be eligible for loan forgiveness under certain circumstances. To be eligible for 100% forgiveness, your business must have maintained the number of employees and corresponding salary levels at roughly pre-pandemic levels. You must then have used the loan proceeds toward eligible payroll costs, payments toward business mortgage interest expenses, rent, or utilities during the covered period (either 8 weeks or 24 weeks) after disbursement. You generally should opt for a 24-week covered period unless doing so would make you ineligible for full forgiveness since you will likely need to gather fewer, larger items to document the forgiveness eligibility. The only situation in which you would opt for an 8-week covered period would be if you were eligible for 100% forgiveness during that time period, but not in the 24-week period. You do not have to apply for forgiveness by 12/31/2020 – you have up until 10 months after your 24-week covered period ends. There is no tax advantage to applying before or after year-end but no reason to wait either.
If your business is not eligible for 100% forgiveness, a percentage of the PPP loan may still qualify for partial forgiveness. You can apply for PPP loan forgiveness once you have used all the proceeds for which you are requesting forgiveness. The application can be made at any time up to the maturity date of the loan. However, you will be required to make loan payments to your PPP lender if you do not apply for forgiveness within 10 months after the last day of the covered period.
TAX DEDUCTIBILITY ALERT: The bill passed by Congress ensures the expenses used for PPP forgiveness ARE deductible. This makes some year-end planning easier since we do now know the outcome.
FORGIVENESS ALERT: The bill also provides a very simplified application process for PPP loans under $150,000 that will not require sending the documentation in to the lender. It seems likely you will get quicker forgiveness by waiting and submitting this simplified form rather than submitting a regular application right now.
PPP2 (New round of forgivable loans)
A 2nd round of forgivable PPP loans are available to businesses with less than 300 employees AND a reduction in revenue of 25% in any calendar quarter in 2020 compared to 2019. The use of funds is similar to the first round of PPP in that at least 60% of the loan amount must be used to pay wages and benefits and no more than 40% of the loan amount on rent, utilities and PPE. The criteria for measuring FTE counts are not as clear but will be clearer as more information comes out. It appears that if you did not obtain the maximum PPP1 loan, you may be able to have that added to the PPP2 forgivable loan if you qualify for PPP2.
In these uncertain times, it may be wise to contact us to ensure your business needs are met and ready for the upcoming year. We will be pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not.