The Coronavirus pandemic has been devastating to the economies of Maryland and the U.S. According to the Pew Research Center, about half of all lower-income Americans report household job or wage loss due to COVID-19 business closings. The virus is disproportionately affecting the small businesses that employ almost 59 million people in the U.S. and more than a million people in Maryland. To help small business owners stay in business, Congress passed the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.
The Paycheck Protection Program
The PPP is a loan administered by the Small Business Administration (SBA) to give small business owners incentives to keep workers on their payroll. SBA will forgive the loans if a borrowing employer meets all of the employee retention requirements and uses all of the funds for eligible expenses. Despite this guidance, there are still areas of confusion related to PPP loans, their forgiveness, and how they affect tax-deductible expenses.
Deductible Expenses and PPP Loans
There is still some confusion over which expenses are tax-deductible when a business receives a PPP loan. A forgiven PPP loan is not taxable income. But the Internal Revenue Service (IRS) warns that deductions won't be allowed for expenses if payment results in forgiveness of a PPP loan. The IRS reasons that allowing deductions for expenses paid by a forgiven loan would allow taxpayers to "double-dip." Many organizations are urging Congress to allow businesses to deduct PPP expenses anyway. But whether Congress will act is still up in the air.
Blanket Loan Forgiveness
Because the PPP loan forgiveness process is tedious and lengthy, some Congressional members have urged a simplified forgiveness process for loans under $150,000. Most PPP loans were for $150,000 or less, which would ease the administrative burden on the majority of small businesses that received PPP loans. Whether this will happen is, again, still up in the air.
Forgiveness Application Deadline
While there is no specific application deadline for PPP loan forgiveness, borrowers must begin payments on the loan ten months after the end of the covered period of their loans, usually 24 weeks. If the borrower applies within this period, they won't have to submit any loan payments until the SBA remits the loan's forgiven portion to the lender. If the SBA fully forgives the loan, the borrower won't have to pay anything.
Once the borrower applies for loan forgiveness, the lender has 60 days to give the SBA a decision. The SBA then has 90 days to review the application and remit the loan's forgiven amount to the lender. Of course, in an ideal world, no one would be applying for loan forgiveness until Congress clarifies all of the uncertainty regarding allowable deductions and the burdensome forgiveness application process. Unfortunately, small business owners can't rely on Congressional action right now.
The attorneys at Gabaie & Associates, LLC have decades of experience assisting clients with tax problems, planning, and liabilities. If you need help determining how the Paycheck Protection Program will affect your business and taxes or how to ensure loan forgiveness, contact Gabaie online for a free consultation or call us at 443-345-8291.