As of this writing, you have likely exhausted your PPP loan proceeds through qualified expenses or are very close to doing so. If you’re like most, you’d like to have approval for forgiveness and put this loan behind you as soon as possible. The SBA opened the portal for forgiveness applications last week, but should you jump on the opportunity to apply?
Well, like most things PPP related, there is some uncertainty out there regarding whether or not to apply. Let’s break it down into three considerations: Financial Statements, Federal taxes, California state taxes.
Financial Statements
In June 2020, the AICPA issued guidance regarding the accounting for the forgiveness of Paycheck Protection Program loans. The new guidance provides two different options under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 450-30, or by analogy to ASC 958-605.
Under ASC 450, an entity would only recognize the forgiveness of the loan when the SBA has formally approved forgiveness of the loan. However, the second option would allow companies to accelerate the recognition of the loan forgiveness as the conditions of forgiveness have been substantially met. Here are some considerations when making the assessment of whether you’ve “substantially met” the conditions of forgiveness.
1. Have you exhausted your PPP funds on allowable costs?
2. Have you maintained your FTE through the period of forgiveness?
3. Of particular importance for loans in excess of $2,000,000, did you make your certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations” in good faith?
Companies should work with their CPA in assessing when to recognize the loan forgiveness and whether they qualify for accelerated recognition prior to the SBA’s formal forgiveness approval.
See the AICPA’s new guidance attached here.
Federal Taxes
At the end of 2020, Congress passed, and President Trump signed, a new law that provides for additional relief related to the coronavirus (COVID-19) pandemic. The law allows for businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans for Federal tax purposes. Thus, the PPP forgiveness is now tax-free for federal income tax purposes.
California Taxes
Initially, California had deemed the PPP forgiveness to be fully taxable. They then opted to conform with the initial Treasury ruling that expenses utilized to achieve forgiveness would be non-deductible for income tax purposes. California has not yet ruled on how they will adjust for the new Federal ruling. Stay tuned for more information.
To summarize, as has been the case with the PPP program from the beginning, there remains uncertainty in the process and what you should do regarding the timing of your forgiveness application. Please be sure to work closely with your CPA in regards to your personal situation. As always, don’t hesitate to reach out if you have any questions.
This article is intended for educational purposes only and is not a substitute for obtaining competent accounting, tax, legal, or financial advice from a certified public accountant, attorney, or other business advisors. You should not act upon any of the information in this article without first seeking qualified professional guidance from your business advisors on your specific circumstances. The information presented should not be construed as advice or guidance from BFBA.