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.
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.
It’s important to note that as of the date of this article, the forgiveness of the loan is non-taxable for Federal tax purposes. However, the IRS position is that the expenses utilized to achieve forgiveness are non-deductible for Federal tax purposes. So what does that all mean from a timing perspective?
Let’s consider a calendar year-end company that has applied for but not obtained forgiveness as of December 31, 2020. It is likely that the Company would not be able to deduct the allowable expenditures on the 2020 Federal tax return regardless of whether approval was obtained before or after year-end. Thus, as the law currently sits, the taxes are to be paid in 2020 to the extent the expenditures were incurred during the year then ended. Given that we have some flexibility on the financial statements as discussed above, we should be able to mirror the financials and the Federal tax consequences of the loan forgiveness.
The California side is a little trickier. Unlike for Federal tax purposes, the actual forgiveness of the loan is taxable in the state of California and the expenditures are still deductible for state purposes. Thus, for California the “income” will be triggered upon approval of your forgiveness by the SBA. Utilizing the same example from above, if forgiveness is not obtained prior to December 31, 2020, the amount would be taxable for state purposes on the 2021 tax return.
Here’s the kicker… At this point, we’ve all heard rumblings about California Assembly Bill 1253 which would impose a tiered “surcharge” of up to 3.5% for taxpayers with income starting at $1 million. If approved by a supermajority vote of both houses before the end of August and signed by Governor Gavin Newsom, AB 1253 would be retroactively applied to January 1, 2020. We’ll save the discussion on AB 1253 for another article, but for now, how would this potential new law impact our PPP loan forgiveness. To analyze, we’d have to consider what your income levels are for 2020 vs. the outlook for 2021. The proposed Bill would increase taxes by 1.0% for income over $1 million, 3.0% for income over $2 million, and 3.5% for income over $5 million. Whether the Bill passes and is retroactive to the beginning of the year as currently proposed will be a major factor in the timing of your application.
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.