Should You Wait to File Your PPP Loan Forgiveness Application?

Most Paycheck Protection Program (“PPP”) borrowers are working toward full forgiveness of their PPP loans and are anxious to get this process started. A borrower generally may submit a loan forgiveness application any time on or before the maturity of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds. But that does not mean a borrower should submit a loan forgiveness application as soon as possible.

There are many considerations you should take into account when deciding when to submit forgiveness applications to the lender. Patience and adequate preparation might be more than just virtues in the PPP loan forgiveness context; they might lead to financial benefits for borrowers as well.

There are legislative proposals to reduce this paperwork and streamline the process for loans under $150,000. As such, we expect changes to these loan forgiveness applications.

The covered period of PPP loans was extended, so there is no need for a borrower to rush the loan forgiveness application process. The Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) was enacted on June 5, 2020, and it extended the covered period from 8 weeks to the earlier of December 31, 2020, or 24 weeks from the date of the loan. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination.

Because of the constantly evolving guidance with respect to loan forgiveness, borrowers should consider waiting before they file their loan forgiveness applications. Although the plain language of the acts related to the PPP might seem clear, the constantly evolving guidance from the SBA and Treasury may change interpretations. Because new interim final rules are coming out and further pandemic aid bills are still being introduced into Congress, hurrying up the process of filing for loan forgiveness might not be warranted if the forgiveness landscape continues to change.

On April 30, 2020, the IRS issued Notice 2020-32 clarifying that no deduction is allowed under the IRS Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan and the income associated with the forgiveness is excluded from gross income.

On November 18, 2020, the IRS provided additional guidance in the forms of a Revenue Ruling and Revenue Procedure. That additional guidance essentially provides (1) PPP loan borrowers may not deduct certain expenses if they have applied for forgiveness or could reasonably have been expected to apply for forgiveness by year-end; and (2) in the event the taxpayer is denied forgiveness or irrevocably decides not to seek forgiveness, the taxpayer will be permitted to claim those deductions in either the taxpayer’s 2020 or a future tax return.

With that in mind, borrowers who are considering having all or a portion of those loans forgiven must consider the collateral tax consequence of that forgiveness. To the extent a borrower would have deducted from the taxpayer’s income amounts spent on eligible expenses, the borrower should evaluate whether or not it might pay more in taxes than to pay back some or all of the original loan or how the taxpayer will pay the taxes due on those expenditures.

Taxpayers will also want to separately account for those expenditures so they are easy to pull out and identify in preparing their 2020 (or fiscal year) tax returns affected by the Notice, Revenue Ruling, and Revenue Procedure.

It was the expectation that Congress would overrule the IRS’s position, but that has not happened to date. In the meantime, taxpayers would be best served analyzing the potential tax consequences of the Notice, Revenue Ruling, and Revenue Procedure; and preparing for those tax consequences now.