PPP Questions Linger As Year-End Approaches

YOUNGSTOWN, Ohio – In stark contrast to the early days of the Paycheck Protection Program, borrowers from the federal relief program are today finding themselves in a holding pattern for the next phase

The U.S. Small Business Administration stopped taking applications nearly three months ago and the earliest borrowers – those who got their applications in on the first weekend of April – are just now wrapping up the 24-week period they had to use their PPP funds on payroll, rent or utilities.

But even though borrowers have 10 months from the end of their eight- or 24-week period to apply for forgiveness and turn their PPP loan into what’s effectively a grant, questions loom as businesses enter the final quarter of the year.

“We’re trying to reprogram people from the first round of PPP when there was the idea of doing things as fast as you can to get funds,” says Tim Petrey, managing partner at HD Davis CPAs. “That’s not the case any more. The key is getting it forgiven as easily as possible, not as fast as possible.”

Right now, those same businesses that spent days trying to pull together every possible document they might need to apply for a Paycheck Protection Program loan are being told to hurry up and wait.

The most recent big shift in guidance came Oct. 9, when the SBA and Treasury issued a simplified forgiveness application form – the S form, which joins the standard form and the EZ form – that those who borrowed less than $50,000 can complete. Among the changes are exemptions from having to provide certain calculations.

“Though for some portions they have to make certifications that they complied with the PPP rules,” clarifies Amy Reynallt, part of the team who spearheaded the PPP efforts at HBK CPAs & Consultants, Canfield. “For select borrowers, it is a simplified process but it’s really important that they look at those certifications and agree in good faith.”

In addition to helping borrowers, the simplified form should also prove helpful to banks, says the Independent Community Bankers of America. Loans under $50,000, some 3.75 million of them, accounted for $62 billion, according to the association’s vice president of congressional relations and strategy, Paul Merski.

“It’s not a big dollar amount out of the whole $525 billion, but that’s still 3.75 million [businesses] that have to calculate for full-time equivalent employees and wages and [other] things for a confusing forgiveness application,” he says. “If there’s less confusion for the borrower, that also saves our community bankers time because there can be a lot of back-and-forth if the application isn’t correct. The less complex the application is, the easier it is for a banker to approve.”

So far at Premier Bank, the process has gone fairly smoothly, though only about 350 of the bank’s 2,800 PPP borrowers have submitted forgiveness applications, according to commercial banking manager Josh Toot and SBA lending specialist Chad Paul.

“We first got this and it was a mad rush to get funds out. Everyone was getting in line. Now, it’s almost the exact opposite. Everyone’s taking their time to make sure they get the right forgiveness and that they’re doing the right things,” Toot says.

The Paycheck Protection Program team at the bank has talked to nearly all borrowers, Paul says, to check in and see what their plans are. So far, business have generally fallen into two categories: those who want to put all of this behind them and those who are waiting to see if more favorable legislation comes out.

“Everybody’s goal is to get it fully forgiven. There have been a couple that have been a little short [of full forgiveness] but we’re working with them to make sure they know all that can be included,” he says.

Once an application has been submitted, the bank reviews it and makes a recommendation – full, partial or no forgiveness – to the SBA, which then has 60 days to make a final decision. Right now, Premier is seeing a turnaround “well within that” time frame, Paul says, though it may slow as volume increases.

Even if a borrower is awaiting a response, Toot says Premier’s policy is to not require payment.

“There was a deferment period where there was no payment, no interest, nothing due. We’re coming up on the end of that period shortly but there will not be payments made,” he says. “We’ll make modifications to the notes and push them back out.”

Reynallt and Petrey both say some larger banks aren’t accepting forgiveness applications for all borrowers yet, opting to hold off if the PPP loan amount was under $150,000 as they wait to see if more relief may come.

“I think they’re anticipating either more streamlined or automatic forgiveness for those loans,” Petrey says.

Such relief is likely to be tied to the next federal coronavirus relief bill that’s been plagued by gridlock and pre-election posturing. A new $2 trillion relief package has been proposed by Democrats. With time running out before the election and resistance coming from Republicans, it seems unlikely that a deal will be struck before Election Day.

The Independent Community Bankers’ Merski says there is “broad bipartisan support and industry and small-business support” for a standalone bill that would provide greater relief for Paycheck Protection Program borrowers. Already, he says, the legislation has 140 cosponsors in the House and Senate on both sides of the aisle.

“The lender would rely on the borrower’s certification that they used the PPP funds as appropriate. If it passes, that would greatly further simplify the PPP process for borrowers, the lender and the SBA, which also has to analyze and approve these applications,” he says.

But the issue is that the relief is being tied to the larger bill.

“The key to the grant program is forgiveness and it came out overly complex. Virtually every small-business group, every PPP lender and bipartisan members of Congress are supporting this legislation,” Merski says. “As standalone legislation, we think this would sail through.”

With gridlock slowing down changes to the Paycheck Protection Program, business owners are starting to show some concern, bankers and accountants say. As the end of the year approaches, many are starting their tax planning and without solid answers are left to guess at their liability for the loans.

At the federal level, a provision in the original Cares Act dictates that unlike typical forgiven debts, PPP loans don’t count as taxable income. But what’s less clear is the expenses around the loan and whether those do count as tax liabilities.

“The Treasury has said that when you have nontaxable income, the expenses it generates are nondeductible,” says Ben DiGirolamo, principal of the tax advisory group at HBK. “So while there’s nontaxable income if the loan is forgiven, there are expenses used to substantiate that, the biggest that we’re seeing being payroll costs, along with things like utilities and rent and interest on loans.”

The question of state tax liabilities is also up in the air and potentially has 50 answers. Some states, DiGirolamo explains, automatically match federal liabilities – such as Ohio – while others choose on a case-by-case basis. Pennsylvania, he notes, has yet to decide how it will approach the loans for tax purposes.

“The net result of that, if you think from a tax standpoint, is that effectively the income is taxable. It can be done one of two ways: either you deny the deductions or you tax the income. You get to the same place,” he continues. “That’s been controversial. Congress said explicitly that they don’t want income to be taxable but they didn’t address the expense side.”

Whenever a business ends up applying for forgiveness, it must adhere to the rules and guidance in place when it submits its application, Reynallt adds.

And so, as business leaders await answers to questions that have wracked their brains since the inception of the Paycheck Protection Program, the best advice bankers and accountants offer is to be patient.

“You don’t want to hurry up and do something because when it comes to working with the government, it’s time consuming and cumbersome to undo things,” Petrey says.

Part of that patience also includes staying in touch with advisers, whether they be accountants, bankers or anyone else who’s helped businesses through the process so far.

“All of this continues to be a fluid situation,” HBK’s Reynallt says. “This program is unprecedented and what we’re seeing is guidance and legislation that’s rolling as the program moves forward. For borrowers with outstanding loans, whether for liability purposes or another purpose, it’s important to keep in touch with advisers.”

Pictured: Ben DiGirolamo and Amy Reynallt of HBK CPAs & Consultants say that although businesses have 10 months to apply for forgiveness, many are ready to move ahead.