Imagine a year of surprises nearly every Monday, long established traditions being paused or deleted, and new behaviors being mandated every month. Now realize this is not your imagination. This is 2020.
Like 2020, being tasked with researching a newsletter about PPP forgiveness has proven difficult to navigate. On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), was signed into law. Included within the CARES Act was the creation of a hastily designed, but wholly necessary, relief option known as the Payroll Protection Program (PPP).
In order to make funds accessible in a timely manner, Congress provided for the program to be implemented by the United States Small Business Administration (SBA), via private loans, with the cooperation of a series of approved lending institutions. The goal was to escalate relief, with certain safeguards and repayment terms in place. Whether the money would be partially forgiven, fully forgiven, or conditionally forgiven, based on a company’s characteristics, immediately became a topic of conversation and theory. To complicate matters further, there have been so many other issues in 2020 that the government has embraced the distractions, and has not fully addressed the issue of PPP forgiveness.
Well into the last quarter of the year, many businesses have weathered the initial storm, and have been able to continue their existence. Although some businesses are thriving, it is safe to assume a high percentage are at a point of minimal profit or no profit at all. Now is the time to prepare for the tax implications of utilizing the PPP loan and prepare for PPP forgiveness.
For the smallest loan amounts, in an attempt to streamline the process, the SBA created SBA Form 3508S. The process of using Form 3508S requires fewer calculations and less documentation for eligible borrowers who borrowed $50,000 or less. Businesses who fall within this category, will also be exempt from the reduction of forgiveness required by the original program guidelines when full-time equivalent employees or employee wages were reduced during the covered period. When using this form, documentation is not required by the SBA, but the SBA may request information and documentation during its review process. As a result, although not yet required by the SBA, financial institutions have been requesting the information and documentation for their files. Of course, this trend reduces how stream-lined this process is in practice.
Now for the theories to address what hasn’t been addressed by the government. Normally, when a loan is forgiven, the loan amount would be considered income and taxed at the appropriate tax rate. This will be referred to as the “Tax-As-Income” option. Although this repayment option is better than having to repay the full amount of the loan, the tax can be a pretty heavy financial burden for companies who have had a profitable year.
To ease the minds of those concerned with the “Tax-As-Income” option, there is a well circulated theory that the IRS will allow for the loan to be forgiven without directly impacting income, but the proceeds from the loan will not be allowed to be included as deductible expenses. This option will be referred to as the “No Deduction” option. Of course, this too will result in an increase in income and a tax on the resulting income.
There is one option that you do not hear about, but this author feels would stay in line with the intent of the creation of the program. This option will be referred to as the “Special Tax Bracket” option. Due to the structure of the tax code, both a “Tax-As-Income” option and a “No Deduction” option would lead to a different fee for a company that was financially successful versus a company that did not make a profit. The most financially successful companies would have to pay higher amounts due to their tax bracket, and those amounts may be well beyond reasonable compared to those who do not have to pay a tax. As a valid compromise, Congress could explore the possibility of creating a special tax bracket designed specifically for PPP forgiveness. With this option, businesses will have more money to invest, and the government will be able to recuperate some tax funds to begin the recovery of the nation’s finances.
Of course, there are many other options that might be created, and staying with the trend of this year, we likely won’t be able to predict the exact solution. Whichever option is utilized, many companies are going to realize they have a profit, and they owe taxes, despite the belief they were going to be in a net operating loss for the year.
All of the above being said, there is still a consistent resource available to businesses to help offset the looming tax liabilities. That resource is the Research and Development Tax Credit. Despite many companies believing they are not eligible for the R&D Tax Credit, this credit is available to a diverse range of businesses and industries, and Apex is a valuable resource to examine a company’s eligibility.
Apex utilizes 20 years of experience, and a team of professionals that includes attorneys and CPAs, as well as professionals who have experience working at the IRS as agents and attorneys. All of Apex’s studies involve a thorough review of data points and contract analysis when applicable.
It must be noted, this article is intended to be brief; therefore, it is not all encompassing. To discuss the topic in more detail, or to discuss other related topics, please call the offices of Apex Advisors, or David Porada directly at 248.259.7421.