PPP Forgiveness and your 2020 Tax Return

This post has been UPDATED as of 12/30/2020 with legislation from the Appropriations Act 2021.

UPDATE: How PPP forgiveness affects net Income.

In the latest Stimulus Bill, Congress has clarified their intent in regards to the deductibility of PPP forgivable amounts. Here’s what you need to know:

If you file Schedule C or F and have no W2 employees (such as Sole proprietors, and Single Member LLC’s) the PPP program will have no tax effect for you. This is because the PPP amount loaned was based on net income and not expenses. (Which makes sense, seeing that this type of owner pay is not an expense but rather a reduction of equity.) This is good news.

If you file 1120, 1120s, 1065 (such as C Corps, S Corps, and partnerships or an LLC with employees) there will NO LONGER be tax adjustments for the 2020 tax year. Expenses paid with the PPP funds that qualify for forgiveness will BE allowed to be deducted as expenses.

We’ve been wondering about how this will be handled for a while and now we have clear guidance.

What this means, the amount of PPP funds spent on qualifiable expenses ARE deductible. They will reduce net income.

Additional Information to Keep in Mind

EIDL Grant/Advance:

UPDATE: How the EIDL Grant/Advance affects PPP Forgiveness

In the latest Stimulus Bill, Congress has clarified their intent in regards to how the EIDL Grant affects PPP forgiveness. PPP forgiveness is NO longer reduced by the EIDL grant/advance. What this means – When you apply for forgiveness with your lender the SBA will NOT reduce down your PPP forgiveness amount by the EIDL advance amount.

For example, Let’s assume you received a $50,000 PPP loan and a $3,000 EIDL grant/advance. Let’s also assume you spent the PPP funds based on the program rules. The SBA will potentially forgive $50,000 without taking into account the $3,000 grant.

This is great news for business owners!

Note: The EIDL Grant is sometimes referred to as an advance. It was the amount that was based on the number of employees. $1000 per employee up to $10,000. It was automatically deposited into your bank account after applying for the EIDL Loan.

REQUESTING FORGIVENESS:

According to the SBA, forgiveness can be requested anytime up to the maturity date of the loan. However, it’s in your best interest to request forgiveness before loan payments start.

You have 10 MONTHS after the end of the PPP period which is either 8 weeks or 24 weeks before loan payments begin. I would select the 24-week period regardless.

The forgiveness application defaults to 24 weeks. If you received the PPP funds prior to June 5^th and would rather use the 8-week period, you will have to specify.

There are many benefits to using the 24 week period. One of them being that the probability of you spending the entire PPP amount on payroll is high. If during the 24 week period you use all the funds on payroll cost then when you apply for forgiveness the application process and required backup will be streamlined. And keep in mind, many payroll processors have created specific reports for the PPP forgiveness process. It’s probably easier for you to gather payroll documentation than it would be to gather rent, utility, and mortgage interest statements/contracts.

Any amounts remaining as a loan are treated as follows:

If PPP funds were received prior to June 5^th the interest rate is 1% and the payback period is 2 years.

If PPP funds were received June 5 or after the interest rate is 1% and the payback period is 5 years.

Interest starts accruing at the time of receipt and is non-compounding.

Forgiveness Forms:

3508 – This is the standard form that anyone can complete

3508EZ – This form can be used instead of the longer 3508 if you qualify based on 3 questions listed on the form.

3508S – Created for loans $50,000 and below only.

In the new legislation, PPP loans of $150,000 and lower will have an easier forgiveness application. It’s my understanding that a new form will be available soon that will replace the form 3508S.

Prior to this new legislation, I recommended waiting to apply for forgiveness. Now that there is clarification, I don’t see any reason to wait longer. As of 12/30/2020, banks are waiting for the new forgiveness form and are updating their procedures based on the new guidance. I recommend submitting your forgiveness application as soon as your lender is ready to accept them.

For step-by-step instructions on how to enter the various loans in your accounting system check out this article.

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~ Brandon & Christi are successful business owners who enjoy traveling and making a mess in the kitchen with their two daughters. They reside in the Dallas, TX Suburbs and work with businesses throughout the U.S.

The article is for informational purposes only and should not be construed as business, accounting, tax, or legal advice. Details are subject to change without notice.

Be sure to consult with your tax professional. PPP information is from the Appropriations Act, 2021.