PPP debtors have been pressured to forgive. Why ought to they decelerate?
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Small businesses that have taken out forgivable credit this year – like their banks – can’t wait to clear the balance, but tax professionals are telling them to slow down.
The CARES Act, which went into effect this spring, introduced the Paycheck Protection Program, an emergency funding line for small businesses suffering from the coronavirus pandemic.
Between April 3 and August 8 – the last day a company could have applied for a loan – more than 5 million PPP loans, representing $ 525 billion, were approved, according to the Small Business Administration.
Applicants are entitled to forgiveness if they use at least 60% of the proceeds for wage costs. Companies that do not reach the amount can be partially awarded.
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This fall, the SBA and Treasury signaled that they were ready to begin processing the loan. In October, the SBA introduced a simplified application (known as Form 3508S) for companies that had received a loan of $ 50,000 or less.
Borrowers can ask for forgiveness at any time until their loan is due. If they do not ask for forgiveness within 10 months of the last day of the covered period – the 8 week or 24 week period for the use of the proceeds – borrowers must begin making payments.
“Nobody should have to make a payment this year unless they have asked for forgiveness and their lender has received a remittance from the SBA and has outstanding balance,” an SBA spokesman said.
However, some banks send letters to borrowers asking them to apply for credit deletion or make plans to start paying.
“Thank you for trusting Florida Credit Union with your Small Business Administration (SBA) Paycheck Protection Program (PPP) loan,” said an email sent to a borrower by CNBC.
“Your loan obligation is due on your first payment date on November 15, 2020,” the letter continued. “Please note that this loan is not a grant. As a reminder, you must apply for a loan using the link below.”
The wording is enough to get applicants to speed up the process – which, according to tax professionals, could be a huge mistake.
“I spoke to the vice president of a community bank who tried to argue with me that it is in the best interests of the customer to immediately seek forgiveness,” said Adam Markowitz, registered agent and vice president of Howard L Markowitz in Leesburg, Florida.
“Under no circumstances is that true,” he said. “Is it more beneficial to ask for forgiveness now?
“It doesn’t hurt to wait.”
The uncertainty persists
Tax professionals have been reluctant to persuade clients to forgive because so much remains uncertain about the PPP loan program.
Legislators have been battling for the next round of Covid-19 aid for the past few months, including next steps for cash-strapped PPP borrowers.
Tax deductibility is at the heart of the conflict for small businesses and the tax professionals who support them.
The PPP loan is tax-free, but borrowers cannot claim any tax deductions on business expenses that are covered by loan proceeds, according to the IRS.
These are $ 300,000 to $ 400,000 in loans that they receive if they are not granted. So this is over their heads and they are eager to deal with this part of PPP.
Founder and Director at Butler-Davis Tax & Accounting
Meanwhile, members of Congress on both sides of the aisle have pushed for deductibility. Sens. Chuck Grassley, R-Iowa, and Ron Wyden, D-Ore., Proposed a bill that would allow small businesses to deduct these recovered costs.
Deductibility is important because entrepreneurs’ taxable income appears higher on paper without these depreciations.
This could also affect their eligibility for certain tax credits when the time comes to file their 2020 returns.
“People with large loans and large deductions are telling them to hold back,” said Dan Herron, a certified financial planner, CPA and director of Elemental Wealth Advisors in San Luis Obispo, California.
“If we include the money, they have income,” he said. “If we don’t do that, they are at a loss.”
The lack of a clear path for deductibility also affects business owners’ ability to plan their cash flow needs for 2021.
“People base their business decisions on forgiveness and worry about loan payments,” said Nicole Davis, CPA, founder and director of Butler-Davis Tax & Accounting in Conyers, Georgia.
Indeed, some of their PPP borrower customers have received notices from their lenders asking for forgiveness.
“These are $ 300,000 to $ 400,000 in loans that they can get if they are not granted. So this is over their heads and they are eager to deal with this part of PPP,” said Davis.
Easy forgiveness for some, not all
If you received a notice from your lender, use caution and speak to your tax advisor before asking for forgiveness. Sometimes inaction is the best course of action.
The smallest borrowers – namely, sole proprietorships with no employees and firms that have drawn less than $ 50,000 – may have a simplified forgiveness process.
Applicants with higher credit balances, a significantly shifted workforce over the year, and other moving parts should better wait for more security.
“Wait a few more weeks and let it play,” said Megan Gorman, founder and managing partner of Checkers Financial Management in San Francisco.
“We don’t know what will happen in future stimulus packages, and the Senate won’t be back in session until November 9th.”