The Paycheck Protection Program (PPP) continues to change form on what seems like a daily basis. The landscape has changed greatly since The CARES Act was initially passed and the covered period has now been extended which enables borrowers more time to use their PPP funds; but the million-dollar question remains:
What does PPP Forgiveness look like right now and how do I ensure my Restaurant loan is forgiven?
RSI Director of Compliance, Brian Smith, and RSI Director of Client Advisory Services, Sydney Lynn, sit down to share their tips on what they’ve seen come through the IRS Notices and the US Treasury Guidance so you can feel prepared as you’re getting ready to start the forgiveness application process for your restaurant.
What Does The Current Restaurant PPP Loan Forgiveness Landscape Look Like Right Now?
- The covered period has been extended which allows borrowers more time to use PPP funds
- There is a new Forgiveness Application along with a shorter EZ Form
- There are additional Safe Harbors for FTE Reductions if you laid off staff
- The timeline to apply for forgiveness has been extended
“From a development standpoint, it’s like trying to build an airplane while flying it because the law has been evolving since the day it was passed”
Brian Smith, RSI Director of Compliance
What are some of the items that may come up in future legislation that restaurant owners/operators should be aware of?
Some of the things that we’ve heard around the Congress Campfire are:
- A second round of PPP; The first round was very beneficial so Congress is trying to come together and come up with a second stimulus!
- Automatic forgiveness for small loans is something else that’s being talked about in congress; amounts from $100K to $150K is the number that’s being thrown around to be automatically forgiven
- The deductibility of expenses that are paid with forgiven PPP funds
Why should borrowers wait to file for forgiveness?
There are two main reasons:
- The banks are developing their systems to interface with the SBA in a way that they’re not accustomed to, and honestly, the banks are looking for beta testers. They need people to start applying for forgiveness so they can test out their systems… Do you want to be the first one across the desert when we’re talking about the possibility of $100K to $150K being forgiven?
- Simply waiting for more guidance; There’s going to be more guidance that comes out as we’ve seen this is an evolving process and hopefully that’ll make it easier to achieve 100% forgiveness, but that’s just something we’re going to have to wait and see
What should you do if the banks are really pushing you to apply for forgiveness now?
From the bank’s standpoint, it’s understandable that they want people to apply quickly because they want to test their systems. However, that being said, the first round of PPP rules and regulations had a different set of payback terms that were required for borrowers when they started making those payments, and it was 6 months from the day they received their loan. The PPP Flexibility Act, which was passed on June 5, 2020, changed those terms and gives the borrowers 10 months from the last day of their covered period, NOT from when they receive their loan, and that covered period could be either 8 weeks or 24 weeks; so, if you use the 24 week covered period then you have 10 months after that period ends to actually apply for forgiveness before any payments and interest would be due.
How can restaurant owners achieve 100% forgiveness?
First and foremost, make sure you’re reaching out to your bank and make sure that they’ve put on the payment schedule that starts 10 months after that covered period, and not six months after you received the loan. Secondly, with the PPP Flexibility Act, a borrower that received their funds before June 5th now has the choice to use either the 8 week or 24 week covered period. The 24 weeks period is imperative here because the borrower will have a better chance to hit 100% or very close to 100% in Payroll Costs on the application. Because we know that borrowers have to achieve at least 60% of payroll costs to have 100% of their PPP loan forgiven, we know that expanding the cover period to 24 weeks provides a much greater opportunity to achieve a higher percentage of Payroll Cost in the application.
Are expenses paid with forgiven PPP funds deductible to the business for year-end taxes?
Currently, expenses paid with forgiven PPP funds are not deductible to the business for year-end taxes. There was an IRS Notice that went out back in April, IRS Notice 2020-32 and it stated:
Forgiven PPP funds are not are non-taxable and not included in gross income on the business Federal Tax Return; Therefore, any expenses paid with the non-taxable Forgiven PPP funds are not deductible.
If the expenses were deductible there would be a double tax benefit:
- You get the free income
- You get to have a tax deduction
This is this from an existing IRS Law, IRC Section 265, that prevents this double tax benefit. The CARES Act deemed the Forgiven PPP funds as non-taxable, but was silent on the deductibility for tax purposes.
Curious to see what our sources are and how RSI can help with reporting for the application process? Check out our vlog to learn more!