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In March, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was intended to provide relief for taxpayers, including those stimulus checks. The law also offered some provisions intended to help businesses, including the much talked about Paycheck Protection Program, or PPP. The program is precisely what it sounds like: billions of (potentially) forgivable loans to keep workers on the payroll.
To help get the economy moving, the PPP wasn’t limited to corporations. Sole proprietorships, independent contractors, gig-economy workers, and self-employed individuals were also eligible. Funds from the program could be used for employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. Money could also be used to pay family, medical, and sick leave.
When the program opened, the rush was on. Initially, just $349 billion was earmarked for loans. The money went quickly: the program opened on April 3, 2020, and closed on April 16, 2020. An additional $310 billion was approved for a second round of PPP funding shortly after; that program closed on August 8, 2020. That means that the SBA is no longer accepting PPP applications from participating lenders.
In total, the PPP resulted in over five million loans totaling $525 billion. According to SBA data, about a quarter of all loans were $150,000 or less.
Almost as quickly as the money went out, allegations about widespread abuse were flying. As of September of 2020, questions about fraud were demanding more oversight. A report by the House Select Subcommittee on the Coronavirus Crisis advised that over $1 billion in COVID relief went to companies in violation of the program’s rules. Specifically, 10,856 loans (totaling more than $1 billion) appeared to be multiple loans to the same recipient. The report also found more than 600 loans (totaling more than $96 million) went to companies that have been debarred or suspended from doing business with the federal government. And there were also more than 350 loans (totaling more than $195 million) that went to government contractors previously flagged by the federal government for performance or integrity issues. Investigations into fraud resulted in dozens of arrests.
But despite the chatter, most of the loans that were taken out weren’t attempts to scam taxpayers: they were good faith efforts to keep the lights on in businesses across the country. However, that doesn’t mean that those business owners are sleeping soundly at night. Even after funds were disbursed, businesses and tax professionals were finding out new information. The rules keep changing, raising concerns about compliance.
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What’s at stake? The goal, of course, for most businesses who took out a loan, is forgiveness. The PPP loan can be forgiven if companies meet the benchmarks for keeping employees on the payroll AND if the loan proceeds are used as intended – that means payroll, rent, mortgage interest, or utilities. A loan that is forgiven is typically treated as taxable income, but this is not the case for the PPP. The amount of any forgiven PPP loan will be excluded from gross income.
Once the money was in hand, borrowers faced a choice: repay the money at favorable interest rates or apply for forgiveness. Loans are eligible for forgiveness if business owners spent at least 60% of the proceeds to payroll expenses (yes, that’s changed from before). If you don’t meet that threshold, you may be eligible for partial forgiveness.
Borrowers can apply for forgiveness now – if they want. The deadline for forgiveness is ten months after the last day of the covered period. But should you act now?
That depends. Banks, of course, are anxious to have those loans off their books. But borrowers may be reluctant to take the plunge just yet. Some business owners are hopeful that more guidance from the SBA may mean an easier path to forgiveness. Still, others are wondering whether the tax rules – specifically, those focusing on deductibility (the IRS has confirmed that expenses paid with PPP forgivable loans cannot be deducted for federal tax purposes) – might change.
A few tax professionals have tackled these topics, no easy feat in a constantly changing landscape. One of them is my Forbes colleague, Tony Nitti. In addition to writing for Forbes, Tony is a Partner in RubinBrown’s Tax Services Group. Recently, I had a conversation with him on my podcast about what you might still need to know about PPP – especially before applying for forgiveness. You can listen to the conversation here (or on your favorite podcast platform, just look for the Taxgirl Podcast, episode 18).
But for those anxious to get the ball rolling now on forgiveness, applications are available. Last month, the SBA rolled out a simplified application (Form 3508S) for businesses that received a loan of $50,000 or less. But use caution: as Tony has pointed out, filling out the form doesn’t mean that forgiveness is automatic.
No matter how you move forward, use caution, and make sure that you have the best information possible. You can read the most recent SBA FAQs for forgiveness here.