To obtain Paycheck Protection Program forgiveness, borrowers must submit applications for forgiveness to their lending institution. The Small Business Administration and many banks have opened up their forgiveness portal.
Should a borrower apply now or wait? Below are the top five considerations for PPP borrowers:
1. Cash flow considerations and the importance of timing.
The deadline for the application is the end of the maturity date (either two or five years from loan origination). However, if a borrower does not apply for loan forgiveness within 10 months of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the payments on the PPP loan are no longer deferred and the borrower must begin payment on principle and interest.
The covered period can be eight weeks or 24 weeks, depending on the borrower and the timing of the loan. If a borrower applies early, the borrower will have to pay the unforgiven amounts soon after the SBA decision, which may be sooner than the 10-month period. Consider whether an application filed closer to the 10-month mark is more beneficial, especially if a borrower expects forgiveness issues.
2. Anticipated guidance and potential for more legislative action.
As recently as Oct. 13, we have seen a new forgiveness application for loans under $50,000 and some clarifications. However, there are still many open forgiveness questions and there is a possibility of legislative changes, including automatic forgiveness for smaller loans (less than $150,000) and a possible second PPP loan program. If any of these items are important to a borrower, the borrower might wish to wait.
3. PPP loan expenses may become tax-deductible in the future.
In April 2020, the IRS issued a Notice indicating that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan and the income associated with the forgiveness is excluded from gross income. It was expected that Congress would overrule this position, but it has not happened to date.
4. All PPP documents need to be ready to present when the forgiveness application is filed.
This task may take some time. The applications and instructions are specific as to which documents need to be presented and which documents need to be maintained. Additionally, a borrower will need to gather all documents that support the borrower’s eligibility, necessity, calculation of the loan, use of the loan proceeds, support of any certifications (such as governmental orders, employee offers and refusals and financial records), and any appeal.
In accordance with interim final rules, all documents need to be in the administrative record in order to support an appeal. That means that a borrower needs to be prepared to provide all the documentation to support an appeal at the time of the forgiveness application. A borrower should not expect to be able to add evidence or documents to the records after a determination.
5. Changes of ownership transactions might affect a borrower’s timing.
There are specific SBA procedures for changes of ownership during the term of a PPP loan. Changes of ownership include equity transfers, asset transactions, and mergers and there are some threshold amounts. Some changes might require lender and/or SBA approval and some changes might require that funds be placed into escrow or other risk mitigation measures. Also, successors might be required to assume the loan, and successors that have PPP loans might be subject to segregation and delineation of PPP funds. If a borrower contemplates changes of ownership, it should reach out to its lender and to its professional advisors to discuss how these items will affect the forgiveness process and timing.
These are just some of the considerations. Other concerns include reviews of loans over $2 million, calculations, loan document amendments and evolving guidance.
In determining when to apply for forgiveness, each borrower should consider its unique position, its lender’s rules and protocols, the ever-changing guidance and the advice of their professional advisors.
A version of this article was originally published in the Portland Business Journal.
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