[Podcast] Making Sense of PPP Forgiveness and the 3508 Application Process
The Paycheck Protection Program (PPP) was closed for new loan applications on August 08, 2020. Upon closing the Department of the Treasury (USDT) reported that 5,212,128 loans had been completed. The process and communications have been tumultuous at best with numerous Interim Final Rules (IFR) and Frequently Asked Questions (FAQs) published by USDT as well as the passing of the PPP Flexibility Act (PPPFA) on June 05, 2020. Some aspects of the loan and subsequent forgiveness have been clarified while others continue to remain unclear. What is clear is there are millions of borrowers at varying stages of their respective covered periods and loan forgiveness is on their minds. When do I apply for forgiveness? Should I apply for forgiveness? Which form should I use? How do I document my changes in FTE counts when it wasn’t my fault? How long will it take for an answer? Why is my bank not accepting forgiveness applications?
Let’s begin with the basic rules first. At least 60% of the PPP funds must be used on eligible payroll costs and no more than 40% may be used for eligible business expenses. One may choose to use 100% of the proceeds for payroll costs if they like which may be easier to document when applying for forgiveness. If loan proceeds were received prior to June 05, 2020 a borrower may select either an 8-week (56 days) covered period (CP) OR a 24-week (168 days) covered period (CP). If loan proceeds were received on or after June 05, 2020 a borrower has a 24-week CP only. The CP begins the date loan proceeds were received unless the borrower qualifies for the Alternative Payroll Covered Period (APCP), which is available to an employer that pays weekly or bi-weekly only. In this case they can start the APCP on the first pay period beginning date immediately following the date loan proceeds were received. This may only be applied to payroll costs and the selection of 8-weeks or 24-weeks is still subject to the criteria regarding the June 5th date above. Eligible business expenses must still follow the standard applicable CP if the APCP is chosen. The borrower must maintain their Full-Time Equivalent (FTE) count compared to one of 2 choice periods (choice periods are either 02/15/2019 – 06/30/2019 OR 01/01/2020 – 02/29/2020 OR a third option for seasonal businesses only, which is any consecutive 12-week period from 05/01/2019 – 09/15/2019) and they must not have any hourly or salary pay decreases for any individual employee in excess of 25% when compared to the pay rates from 01/01/2020 - 03/31/2020. Borrowers have various safe harbors as well as FTE exclusions if they have proper documentation proving the reduction was not their fault (e.g. employee quit, employee was terminated for cause, employee refused to return to work, etc.). Otherwise, reductions in FTE count and/or pay decreases in excess of 25% will reduce the maximum forgiveness amount.
The PPPFA was effective June 05, 2020 and among the changes was an update to the timeline regarding the first loan payment. Borrowers who do not apply for forgiveness have 10-months after the end of their respective CP or December 31, 2020, whichever is sooner, before the first payment is due. This provides borrowers with time to apply for forgiveness. At present there are still numerous banks that are not accepting forgiveness applications as they are waiting for further clarification from the USDT and the SBA. In addition to the need for further clarification for the lenders there are two topics that borrowers may need to consider. The first is in relation to IRS 2020-32 whereby the IRS indicated that any expenses paid with PPP funds that are ultimately forgiven are not tax-deductible expenses. The Treasury, along with IRS believe allowing these tax deductions would be “double dipping” because borrowers received tax free funds through the PPP. Not allowing the tax deductions is turning a tax-free loan into a tax liability on the back end. The spirit of the PPP loan was to keep employees working, keep the economy moving and help businesses weather the COVID storm. As such there have been congressional discussions fueled by trade associations and lobbyist to pass a bill that would allow business expenses paid with PPP funds that are ultimately forgiven to remain a tax-deductible expense. There isn’t a bill yet, so it is imperative that borrowers advocate for themselves by contacting their State and District congressional leaders to express their concerns. The second is a very slim chance that USDT or Congress will reconsider an “automatic” forgiveness of PPP loans of $150,000 or less. This may never come to fruition, but whispers of it remain after the issuance of Form 3508S on October 08, 2020 which DOES provide an “automatic” forgiveness, with required borrower attestations under penalty of perjury, for loans of $50,000 or less.
Once a borrower decides to apply for forgiveness it is a matter of completing the correct form and submitting it to their respective lender with any required documentation per the loan application instructions. Note that any documentation proving proper utilization of funds for eligible payroll costs and business expenses, FTE counts, pay changes, calculations, etc. need to be saved for auditing purposes for 6-years, even if the lender does not require this documentation to be turned in with the application for forgiveness. Now, which form should one use? Just remember “S-EZ”. Use Form 3508S if your loan is $50,000 or less. If not, review the qualifications on Form 3508EZ instructions to determine if you qualify to use Form 3508EZ. If you do not qualify, then Form 3508 is your only option. So, to reiterate evaluate in this order; 3508S, 3508EZ, then 3508. Also, keep in mind that many lenders have created web-based portals for these submissions. No matter the method, it is strongly recommended that borrowers have their forgiveness applications reviewed by an accounting professional prior to submission as the SBA has indicated they will reject any applications with errors or omissions. Once the lender receives the full package (correct loan forgiveness application and any required supporting documentation) they have 60-days to review and submit to the SBA, then the SBA has 90-days to review and respond. Any unforgiven portions of the loan will be due and payable to the lender based on the terms and conditions of the initial agreement.