PPP's tax impact

Updated November 20, 2020

It’s been a doozy of a year for small businesses and keeping up with changes to the Paycheck Protection Program has become another full-time job for some of us. Congress’ aid for small businesses during the pandemic has had a wide variety of consequences (some intended, some not), and we can’t stress enough how important it is to consult with your strategic advisor if you’ve received one of these loans. Up next: understanding PPP’s tax impact and choosing the right forgiveness application.

Tax impacts of the Paycheck Protection Program

First and foremost, Paycheck Protection Program recipients need to be aware that the loan may impact your 2020 taxes. Unlike other forms of cancelled debt, forgiven PPP funds won’t be counted as income on your tax return. The expenses that those forgiven funds covered, however, cannot be counted toward your business tax deductions. Depending on the forgiveness period you have chosen and your overall business income for the year, PPP’s tax impact could have a significant effect on your overall tax burden. Schedule a meeting with your tax advisor during the fourth quarter to ensure you’re not facing a surprise when it comes time to file your tax return in 2021.

UPDATE: Disallowing deductions of expenses covered with forgiven PPP funds will also apply if you expect your loan to be forgiven—even if you haven’t yet applied for forgiveness. 

Another new PPP forgiveness application

Is the third time the charm? Another PPP forgiveness application is now available for the 3.5 million borrowers whose loans were less than $50,000. In an effort to continue to make the PPP loan forgiveness process easier, the Small Business Administration, along with the Treasury Department, released yet another application earlier this month.

The new application, SBA Form 3508S, was created to streamline the forgiveness process for borrowers. The form has been shortened to just two pages (including an optional page for demographic information). It eliminates the need to complete a full-time equivalence (FTE) or salary reduction calculation, as this information isn’t required from borrowers who received these smaller loans. According to the CARES Act, these borrowers are exempt from the provisions that impose a reduction penalty if the borrower reduced FTE employees or the salary or wages of employees during the covered period.

While this form requires fewer calculations and less documentation than the other two forms (SBA Forms 3508 and 3508EZ), applicants are still required to produce documentation that proves:

  • Funds were used for eligible expenses
  • Payroll costs were at least 60% of the forgiveness amount
  • They met the owner-employee’s limitations and caps.

That documentation may include:

  • Tax forms
  • Payment receipts, cancelled checks, or account statements that document the amount of employer contributions to employee benefit plans
  • Copies of lender amortization schedules
  • Receipts verifying eligible payments from the covered period
  • Proof of rent or lease payments
  • Proof of business utility payments

The SBA began approving forgiveness applications as of October 2, 2020. See our earlier post for information about forgiveness applications for borrowers whose loans were greater than $50k.

Automatic PPP Forgiveness?

There’s been a lot of speculation in the media and among bankers that some sort of automatic forgiveness process will eventually be implemented for PPP loans of a certain size. With the number of loans that were disbursed in a short period of time, some people believe that Congress and/or the SBA will take steps to further expedite loan forgiveness. At this time, there is no automatic forgiveness available for any PPP loan recipient. We continue to recommend keeping detailed records as you spend your PPP funds. When you’re ready to apply for forgiveness, contact your bank for further guidance. We will also keep you apprised of legislative changes.

If you have any questions about the PPP forgiveness application process, the documentation you need to provide, or how your PPP loan may affect your taxes, please contact us to schedule a consultation. As the end of the year approaches, time is of the essence to ensure you can make proactive decisions for your business.