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Why PPP Loan Borrowers May Be Feeling Apprehensive About Loan Forgiveness

As the country opens up from the Covid-19 lockdown, the Small Business Administration (SBA) continues to release FAQs for the Paycheck Protection Program or PPP loans. Yet the additional information being released is causing stress for both borrowers and tax professionals alike.

“The guidance for the Paycheck Protection Program has to be the most disappointing aspect of the whole program,” says Brian Streig, Tax Director of Calhoun, Thomson + Matza, LLP, a CPA in Austin, Texas. “The US Treasury and Small Business Administration seem to keep coming out with rules that appear to be against the spirit of the legislation, if not in direct opposition to the legislation.”

This frustration is felt by tax professionals across the country who are trying to help guide their clients to the maximum amount of forgiveness. Many are finding the current guidance does not provide the right level of flexibility to help small businesses and self-employed individuals succeed.

However, a ray of hope has appeared on the landscape due to additional legislation that is poised to clarify issues that have become cloudy during the PPP process. On May 28, 2020, the House of Representatives passed The Paycheck Protection Program Flexibility Act that would extend the forgiveness period from 8 weeks to 24 weeks as well as provide more flexibility in how the funds can be used. The bill is anticipated to pass the Senate shortly.

But with all the challenges the PPP program has faced so far, the question becomes whether the average PPP borrower will be able to sift through the guidance and find loan forgiveness.

The Process Continues To Baffle

One of the biggest frustrations in getting clarity on PPP loan forgiveness is simply how information is being released.

“As for the process as a whole, this is the most unsmooth rollout of a new tax law that I can remember. Not only was it released late at night, there was no notification or announcement from the Treasury or SBA that it was released,” says Steig.

Further once the loan forgiveness guidelines and application has been released, many found that they simply created more questions and is simply not user friendly to borrowers.

“The application states an average of 180 minutes to complete,” explains Eric Hjerpe, CPA and Managing Partner, Hjerpe & Tennison CPAs in Bloomington, Illinois.  “But there are many holes in the application and unanswered questions that were not entirely cleared up with the Interim Final Rule. The SBA and Treasury can’t think of all the scenarios, but some standard guidance is necessary.”

But if tax professionals are frustrated, it can only be harder for PPP loan borrowers who are trying to navigate this without help. 

Unequal Treatment

Another concern surrounds potential lack of equal treatment to all business owners under the PPP rules.

“It does seem like the owners of different types of entities are being treated differently, such as a sole proprietor, a partner in a partnership, an S-Corp owner, and a C-Corp owner,” says Streig. “There are differences in the way the payroll is calculated for forgiveness and the amounts that can be forgiven.”

Some of the biggest concerns center on self-employed individuals and how their forgiveness will be calculated. Based on current guidance, self-employed individuals will be forgiven for payroll 8/52 of the net Schedule C income from 2019. This equation reflects the 8 weeks of income over the entire year.

The maximum loan a self-employed individual could have taken would be $20,833 due to the $100,000 income cap on the PPP calculation. This means under the current formula, $15,835 can be forgiven as owner compensation. That leaves $5,448 to be allocated to other expenses. At the present time, they will not get credit for health care premiums or retirement plan contributions, unlike other small businesses. 

“Up to 25% for rent, utilities, interest but only if those amounts were listed on Schedule C,” points out Hjerpe.  “The question I have is those who received loans based on the guidance early on may be overfunded. Will the 75% rule count and thereby reduce forgiveness for the other amounts, given one of the statements by SBA was they wouldn’t fault those who received loans based on what guidance was in place at the time?”

The risk here is the self-employed individuals might only get credit for taking payroll and end up with the remaining PPP monies as a 1% loan. 

Streig advises, “It seems like additional clarification is needed so that owners are treated the same way regardless of the entity classification of their business.”

What’s On The Wish List

However, the tax community is aware that more guidance is needed. But they are starting to have clarity on where exactly that guidance should be.

Hjerpe lays out a bare minimum of what he is hoping to get from guidance from the SBA. “We need to know what they mean by restoring payroll by 6/30. Is that a snapshot in time? Will they allow 10 weeks of payroll based on the guidance and application? Why no raises for owners when they are doing more work? What if your 30 days has passed on turning an employee in to state unemployment, do we have to count them?” 

Others are more hopeful that Congress might step in.

“One thing I would like to see is Congress clarify that the expenses used toward the loan forgiveness are deductible to the business. The Treasury and SBA will not address this issue again, so it will be up to Congress to make it clear,” says Streig. “Based on the original CARES Act, I don’t think Congress intended those expenses to not be deducted.”

The demand for greater clarity from PPP loan borrowers and the tax community is growing. We need to hope that Congress and the SBA take the steps to protect those who took these loans to protect their businesses.

Source: Forbes – Money

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