Don’t Apply for PPP Loan Forgiveness…YET

If you’re ready to apply for PPP (Paycheck Protection Program) loan forgiveness, WAIT.

As it stands right now, getting forgiveness for your loan could end up costing you more money in taxes. And unlike the super low-interest loan that can be paid back over time, the tax bill will be due in one big lump sum.

Confusing? You bet. For everyone from lawmakers to CPAs to business owners. That’s why it pays to wait until we get the final rules before make your decision.

There’s No Rush

PPP loan forgiveness isn’t a now-or-never kind of thing. Waiting won’t hurt your chances of qualifying. And for most small business owners, the earliest you’ll have to decide will be far into 2021.

Here’s why. You have 24 weeks – approximately 6 months – to use your loan proceeds. Then, you have another 10 months before you have to make your first loan payment. 

So here’s what your timeline looks like, using a made-up start date:

By that time, we will almost certainly know more about how this potentially “free money” will affect your business. Because right now, it’s just not clear.

The Tax Situation Right Now

The way things stand right now, getting your PPP loan forgiven is not taxable.

BUT the expenses that you paid for with that money are not deductible.

Here’s what that means to you. Suppose your company got a $5,000 PPP loan and used it to pay $5,000 worth of payroll expenses. During 2020, let’s say your company had $30,000 in sales and $5,000 in other expenses.

Normally, you’d deduct $10,000 from your sales – the total expenses paid in 2020 – and pay taxes on $20,000. But if your PPP loan gets forgiven, you can only deduct the other $5,000 in expenses, so your business (or more likely you) will be paying taxes on $25,000 of profits instead. And if you weren’t planning for that additional tax hit, it could mess up your business cash flow at a time when money is already tight.

On the flip side, if you don’t apply for forgiveness, you’ll have to start making loan payments at the end of your deferral period. With a $5,000 and 1% interest, your payments would come to $85.47 per month over five years. And you can always pay it back early if business picks up.

Forgiveness Might Get Easier and Better

A boatload of people, businesses, banks, and politicians want to offer better terms for the smallest loans – and that means any PPP loan of $150,000 or less (at least right now). For those loans, the next round of legislation will probably offer automatic forgiveness in exchange for a simple sworn statement from you that you used the money the right way.

That’s because the banks and the government don’t really want to deal with all the paperwork involved with millions of “small potatoes” loans. And that’s a win for most of the companies that got PPP loans.

On to of that, it seems that Congress intended for the loan forgiveness to be not taxable and also allow the related expenses to be deductible. The way the law looks right now, that’s not the case, and the IRS wants to collect as much money as it can. But if you can just wait for this next law to pass – and hopefully it won’t get bogged down in politics – you’ll be able to get loan forgiveness AND keep those valuable expense deductions.

Keep Your Bookkeeping Up-To-Date

Whatever you decide to do about loan forgiveness, keep your business books as current as possible. If you’re already behind, get this caught up ASAP.

Why bother if there might be blanket forgiveness?

Because there will almost certainly be another round of small business funding. And if you want to be able to tap into those funds, you’ll need to be ready and move quickly. The money will be limited, and awarded first come, first served. So you want to be at the front of the line as soon as you hear the announcement. And you won’t be able to participate if your bookkeeping isn’t up-to-date.

Plus, if your loan was for more than $150,000, or Congress doesn’t pass an easy forgiveness rule, both your lender and the SBA will want to see complete, current, accurate financial statements for your business.

If your books are a mess or you have questions about your business tax strategy… contact me ASAP.  I’ll help get your bookkeeping back on track and help you figure out the most beneficial tax strategy for you and your business.

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