Do Your Tax Planning for PPP Loan Forgiveness

Many of ASA’s members obtained PPP Loans, which had been authorized under the CARES Act. One important feature of the loans is the ability to seek loan forgiveness.

Last month the Small Business Administration posted new guidance on PPP loan forgiveness. The new guidance is still incomplete, and leaves a lot of questions unanswered; but it is meant to allow banks to start the process of accepting loan forgiveness applications.

Many banks are still not yet accepting loan forgiveness applications. The Small Business Administration just posted an updated application package for PPP loan forgiveness on Saturday, October 31. So we should expect movement in this area, very soon.

But the question for the ASA Community is. “should I file for loan forgiveness when my bank says it is ready, or should I wait until I am ready?” Filing for loan forgiveness may have tax consequences, and the precise nature of those consequences is still unclear because IRS guidance has suggested a complicated tax treatment for loan forgiveness (in their defense, the complicated tax treatment is based on pre-existing complicated tax laws).

With this in mind, we recommend that you take a strategic approach to the process of PPP loan forgiveness.

STEP ONE: Identify your Covered Period

For PPP loan forgiveness purposes, the Covered Period is a period that starts on the day you received the PPP loan. For example, if you received your PPP Loan on June 25, 2020, then that is the first day of the Covered Period.

The Covered Period lasts for either 8 weeks or 24 weeks. This is because the CARES Act set the Covered Period as an eight week period, but then Congress amended the law so that the Covered Period became a 24-week period. Those who got PPP loans before the change were allowed to choose either option:

  • If you got your PPP loan on or before June 4, 2020, then you get to choose whether your Covered Period is 8 weeks or 24 weeks (whichever one is more optimal for you).
  • If you got your PPP loan on or after June 5, 2020, then your Covered Period is 24 weeks.

For example, if your PPP loan was distributed on June 25, 2020, then you would be subject to a 24-week Covered Period which would end on December 10, 2020.

STEP TWO: Identify the date that is ten months after the last day of the Covered Period

The date that is ten months after the last day of the Covered Period is your deadline for filing the loan forgiveness application. Note that this date is likely to be in 2021 for most recipients. A 2021 deadline typically means that you can file for loan forgiveness in 2020, or you can file in 2021.

If we continue to use the same example period, above, and your Covered Period starts on June 25, 2020 and ends on December 10, 2020, then you will need to submit your loan forgiveness application within ten months, by October 10, 2021.

STEP THREE: Start assembling the loan-forgiveness documentation now.

On August 4th, we advised the community to start thinking about assembling their loan-forgiveness documentation. That blog post links to a PPP loan forgiveness video that ASA produced to help guide members as to the documentation that they should be assembling to support the PPP loan forgiveness application.

Even if your bank is not yet accepting loan forgiveness applications, by assembling the appropriate documentation you can give yourself more flexibility to file the application when you want to do so. You will be able to make a decision about filing optimal dates and then immediately be able to follow-through on the application.

STEP FOUR: Watch for more details!

The law and guidance in this area continues to change. As previously mentioned, there is a conflict between Congress’ apparent tax-free intent and the IRS’ guidance on the matter (which makes the consequence of loan forgiveness to be substantially the same as if the loan forgiveness was treated as income).

New guidance continues to be issued by the SBA and Treasury. So it makes sense to contonue to watch that new guidance (and watch this blog) to identify how the changes in policy might affect your decisions

STEP FIVE: Make an intelligent decision about when to file your loan forgiveness application

An important part of making the intelligent decision is to consult with appropriate tax lawyers and accountants about the tax-effect your decision might have.

Unless the law is changed, the loan forgiveness will not be taxed as income, but the wages paid by the loan will not be allowed to be deducted as ordinary-and-necessary business expenses. For most businesses, this should yield a result that is equivalent to treating the loan forgiveness as income, but also treating the permitted expenses that were paid out of that loan as deductible expenses (the way that PPP loan forgiveness works is more complicated from a tax accounting perspective).

Normally (for accrual taxpayers) the loan forgiveness would not count as income until you file for forgiveness, and the forgiveness application is accepted. Similarly, the deduction for the wages paid from the loan would not be accrued as a deduction until three elements are met:

  • all the events have occurred that establish the fact of the liability,
  • the amount of the liability can be determined with reasonable accuracy, and
  • economic performance has occurred with respect to the liability

This is called the “all-events test.” If it is uncertain whether the wage payment might be deductible, then it is possible that the all-events test could prohibit someone from accruing a deduction for the payment until it was clear that the deduction could be accrued (which might have the effect of postponing accrual of the deduction for 2020 wages paid from the PPP loan until 2021 if the PPP loan forgiveness is not established until 2021. This is something that you should review with your tax accountant to see whether it might apply to your own tax situation.

As you can see, tax treatment of the amounts subject to the PPP is a complicated situation – while we await further IRS guidance about this, it is important to chose whether loan-forgiveness in 2020 or 2021 is preferable The availability of IRS guidance could be a factor that impacts this decision.

STEP SIX: File your loan forgiveness application when it makes the most sense to do so, for your business

Once you’ve consulted with your tax accountant on the optimal way to approach loan forgiveness, and once you’ve reviewed all of the latest guidance from the US government, then you will select a date range that makes sense in which to file your application. Don’t forget to file within ten months after the end of your Covered Period!

About Jason Dickstein
Mr. Dickstein is the President of the Washington Aviation Group, a Washington, DC-based aviation law firm. Since 1992, he has represented aviation trade associations and businesses that include aircraft and aircraft parts manufacturers, distributors, and repair stations, as well as both commercial and private operators. Blog content published by Mr. Dickstein is not legal advice; and may not reflect all possible fact patterns. Readers should exercise care when applying information from blog articles to their own fact patterns.

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