PPP - Forgiveness & Tax Update

Many have asked for the latest update on PPP forgiveness. There are a few Burkland clients who have submitted their PPP forgiveness application, were approved and had their loan fully forgiven.

However, we expect the government to continue to issue guidance and procedures around PPP forgiveness, so if you can hold off or if you have a complicated situation, we recommend waiting.

At Burkland, we will continue to help our clients around PPP forgiveness and monitor for any updates.

PPP Forgiveness Guidance – Update

Here is some helpful information from our partner, Silicon Valley Bank:

1. Determine which SBA form is appropriate – There are three different SBA PPP forgiveness application forms: 3508, 3508EZ, and the 3508S.
   1. To qualify to use the SBA Form 3508EZ, one of the following must apply to your business (if none use form 3508)
      1. Sole Proprietor
      2. Employer – You have not reduced the number of employees at all since Jan 1, 2020, AND have not reduced salary/wages more than 25% during the Covered (or Alternative Payroll Covered) Period for employees earning less than $100k in 2019.
      3. COVID Impact – You are not able to operate at the same level of business due to COVID-related requirements, AND you have not reduced salary/wages more than 25% during the Covered (or Alternative Payroll Covered) Period for employees earning less than $100k in 2019.
   2. Borrowers of PPP loans of $50,000 or less may use SBA Form 3508S if the borrower and its affiliates, taken together, have not received PPP loans totaling $2 million or more.
2. Gather the necessary information – Document your expenses, all payroll costs, and other eligible expenses incurred during your chosen covered period by the borrower named on the PPP loan note. Many payroll services companies or professional employer organizations (PEO) can produce tailored reports that document payroll expenses during the covered period (either 8 weeks or 24 weeks after the date of your loan funding). If you use a payroll service/PEO, ask if they can tailor a report for your forgiveness application. This will streamline your documentation requirements. We recommend reviewing the resources at SBA.gov and Treasury.gov.
3. Determine the best time to apply – You don’t need to apply immediately. Some reasons include:
   1. The SBA may release new guidance and possibly introduce streamlined procedures for forgiveness.
   2. Borrowers electing to use a 24-week Covered Period may apply before the end of their Covered Period.
   3. Per the SBAs August 4th, 2020 guidance, “As long as a borrower submits their loan forgiveness application within ten months of the completion of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA.”
   4. The documentation requirements are complex, and we suggest taking the time to assemble the right information.
4. Change in Control Rules – This is extremely relevant to venture-backed startups. If you’re considering an equity raise, asset sale, or any potential change in ownership, contact your PPP lender as soon as possible. Based on October 2nd, 2020 guidance from the SBA, you must notify your lender of any equity ownership changes and, depending on the structure of transactions, further approvals may be required.

IRS Guidance – Tax Implications of PPP Loan Forgiveness

Here is the most current PPP tax information from Burkland’s Director of Tax, Ardy Esmaeili:

The Internal Revenue Service (IRS) released guidance on November 18, 2020, clarifying the tax treatment of a Paycheck Protection Program (PPP) loan.

Per the IRS guidance, since businesses are not taxed on the proceeds of a forgiven loan, the expenses are not deductible. This doesn’t have any tax implications for businesses since they have not paid anything out of pocket. There is a chance things could change in the future, but for now, it is important to take the time to assess your options and the timing of your loan forgiveness:

• Forgiveness in 2020:
  If you are able to apply and receive forgiveness in 2020, you have nontaxable income and nondeductible expenses for federal income tax purposes.
• Forgiveness in 2021:
  If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the company has filed for forgiveness or not.

Burkland recommends filing extensions for 2020 tax returns, to hold off on filing until forgiveness is determined, or the IRS issues more guidance.

At Burkland, we will continue to monitor all new information and procedures around PPP forgiveness and will update our Covid-19 Resource Center with further information when it becomes available.