At the onset of the Covid-19 pandemic early this year, many successful fix and flip investors suddenly found themselves struggling with project turnaround slowdowns. Covid restrictions severely impacted the availability of building materials worldwide, and here in the U.S., social distancing protocols at job sites slowed project completion, causing delays in paying vendors and employees. Fortunately, many struggling house flippers were able to turn for financial relief to the Small Business Administration (SBA) Paycheck Protection Program (PPP), and the PPP loan forgiveness options offered via the CARES Act.
Since the establishment of the CARES Act in March of this year, more than five million loans totaling over $525 billion were distributed to US small businesses through the PPP, which was established to help small businesses negatively impacted by the Covid-19 pandemic.
PPP Loan Forgiveness for All or Part of the Loan Amount
The window of opportunity to apply for a PPP loan closed in August, but the program continues to assist PPP borrowers by offering loan forgiveness for all or part of the loan amount owed. Under the program guidelines, a CARES Act PPP loan is completely forgivable if at least 60% of the proceeds were spent keeping employees on the payroll. Businesses that do not meet the 60% threshold may be eligible for partial forgiveness.
To make the PPP loan forgiveness application process easier for recipients of smaller loan amounts, in October the SBA introduced a simplified loan forgiveness application (Form 3508S) for PPP loan amounts of $50,000 or less.
As the year draws to a close, many small business are working with their tax professionals to determine the way forward in regards to applying for PPP loan forgiveness. According to the guidelines published by the SBA on their website, borrowers are eligible to apply for PPP loan forgiveness any time up until their PPP loan matures. (If they do not apply for forgiveness within 10 months after the 8-week or 24-week period for use of the loan proceeds – they will have to start making payments.)
Some borrowers have reported receiving letters from their lenders urging them to begin the PPP loan forgiveness application process right away, but tax professionals are advising against rushing the application, concerned that there are some tax planning details that will need to be taken into account to determine the best time to apply.
“I was on the phone with the vice president of a community bank who tried to argue with me that it’s in the client’s best interest to apply for forgiveness right away,” said Adam Markowitz, enrolled agent and vice president at Howard L Markowitz in Leesburg, Florida. “Under no circumstance is that true,” he said. “There is no harm in waiting.” (Assuming a borrower applies within the 10 months after their 8- or 24- week proceed use period, that is).
Keeping an Eye on Congressional Action
So, why not move as fast as you can for loan forgiveness? At issue with rushing the application is tax deductibility for your business. Forgiveness of the PPP loan amount is tax-free, but presently, borrowers are not able to claim tax deductions for the business expenses for which they used the PPP loan proceeds, according to the IRS.
Members of Congress on both sides of the aisle have been pushing for deductibility. Sens. Chuck Grassley, R-Iowa, and Ron Wyden, D-Ore., proposed a bill that would permit small businesses to deduct the costs they paid for with PPP loan proceeds. The deductibility issue is critical because borrowers' taxable income will appear higher without the cost write-offs. Eligibility for certain tax credits may also be affected when filing 2020 returns.
With there being no emergent need to rush the PPP loan application, you may want to proceed cautiously if you’ve received a notice from your lender asking you to apply. Talk with your tax professional before you apply for PPP loan forgiveness.
“Just wait a few more weeks and let it play out,” said Megan Gorman, founder and managing partner of Chequers Financial Management in San Francisco.
