PPP Loan Forgiveness: Why Wait?

August 6, 2020

Many Paycheck Protection Program (PPP) borrowers are anxious to file for loan forgiveness before the 10-month deadline so they can remove the loan from their books and reduce the anxiety caused by the uncertainty of the loan forgiveness process. However, most experts are recommending that borrowers wait to file for PPP loan forgiveness and for good reasons. 

The main reason to wait is that the law for PPP loans and the forgiveness process is still in flux. As of the writing of this blog, Congress is struggling to finalize the next stimulus package, which is expected to include an expansion of the PPP (which would allow certain small businesses to obtain a second PPP loan) and changes to the PPP forgiveness process. 

Because the law governing PPP loans and their forgiveness are still being written, the Small Business Administration (SBA) and other governmental agencies are hesitant to issue final guidance for the forgiveness process.  The SBA has been providing guidance by issuing and updating FAQs on a rolling basis. The most recent FAQs issued by the SBA on August 4 addresses loan forgiveness issues relating to payroll and nonpayroll costs and reduction in forgiveness amounts.  Earlier, the SBA issued a procedural notice stating that it would not accept forgiveness applications submitted by lenders on behalf of their borrowers until a new SaaS platform (PPP Forgiveness Platform) goes live. The PPP Forgiveness Platform is expected to go live on August 10, but the SBA has already made clear that this date will be extended if there are legislative changes to the forgiveness process. 

Another area of the PPP law that is still unsettled is the tax deductibility of business expenses that are paid with PPP loans. The IRS has taken the position that business expenses paid with PPP loans that are subsequently forgiven are not tax deductible. Members of Congress, in reaction to the IRS notice, have publicly stated that was not the intent of the law and a bill amending the PPP law has been introduced to change the tax treatment. Unfortunately, the bill has languished in Congress. In the meantime, borrowers cannot determine which business expenses are deductible and which are not, because they are struggling to determine under the constantly changing guidance how much of their PPP loan will ultimately be forgiven. However, there is some hope that this issue will be addressed by the next stimulus package. 

If a borrower has reduced its workforce, another reason to wait to file for loan forgiveness, is to take advantage of the numerous safe harbors Congress has provided. Generally, a reduction in workforce would result in a reduction in the PPP forgiveness amount. However, several safe harbors allow the borrower to exclude reductions in the workforce if the borrower can show certain conditions existed resulting in the borrower’s inability to return to the same employment level. For these safe harbors to apply, the conditions must exist through the end of the 2020. For example, one of the safe harbors allows a borrower to exclude its reduction in the workforce if its inability to return to its pre-COVID-19 business activity level (i.e., before February 15, 2020) is due to compliance with requirements issued by governmental agencies such as the CDC from March 1, 2020 to December 31, 2020.

Finally, filing for PPP loan forgiveness before the 10-month deadline may start the repayment process earlier if part of the borrower’s PPP loan is not forgiven. 

Even though filing early for PPP loan forgiveness is psychologically enticing, experts are with good reason counseling borrowers to wait until the dust settles.  The law for the PPP loan and the forgiveness process is expected to change and along with it, administrative guidance. Additional safe harbors may be added similar to those that have already been provided which require conditions to be satisfied through year-end. For now, patience unfortunately is the key.  

The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.