Get Ahead of the Impact – PPP Loan Forgiveness

I wish I trademarked the word “uncertainty” back in 2019… the royalties would be amazing! The Paycheck Protection Program (PPP) loan forgiveness and its tax implications are steeped in… you guessed it… uncertainty! The key challenges are the timing of income recognition and deductibility of expenses, among other tax and reporting questions.

Complexity with Timing

It is likely you will not know if your loan is forgiven and by how much until 2021, which will have implications on your tax planning and financial reporting. Here is what we know about the timeline to apply for forgiveness.

Forgiveness Application Timeline

Companies have a choice of “covered period” of eight (8) or 24 weeks or a cutoff date between that range. Each has its own financial implications to consider.

From the end of your chosen covered period, borrowers have 10 months to apply for forgiveness. Once the application is received by the lender, the lender has 60 days to render a forgiveness decision and request payment from the Small Business Association (SBA).

From that point, the SBA has 90 days to remit payment of the forgiveness amount and interest through the payment date back to the lender. It is then the lender’s responsibility to notify the applicant of the forgiveness amount received from the SBA. If the forgiveness application is denied by the lender, the borrower has 30 days to notify the lender that they request a review by the SBA, which the SBA is not required to accept.

So… 10 months + 2 months + 3 months + 1 month = 16 months, after the end of your covered period, which could be ~6 months after your funding date – that means it is conceivable many in the second tranche of funding won’t know until 2022!

If a loan is forgiven, the SBA has a five-year statute of limitations to reassess its forgiveness.

2020 versus 2021 versus 2022

With this timeline, it could be well into 2021 (or 2022) until a borrower knows how much of their loan is forgiven. The question is whether the forgiveness of the loan increases taxable income in 2020 when the proceeds are received and expenses are incurred or in 2021 (or 2022), when the borrower receives confirmation their loan is forgiven.

Following are considerations related to the complexities of tax planning and financial reporting for your PPP loan forgiveness.


For federal purposes, PPP loan forgiveness may be excluded from gross income by an eligible recipient by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

However, the IRS issued Notice 2020-32 in April 2020 which stated expenses associated with the tax-free income are nondeductible. This guidance is consistent with historic IRS positions regarding nontaxable income and related expenses but has the net effect of essentially reversing the tax-free benefit of the exclusion on the loan forgiveness.

While the IRS guidance does not align with Congress’s expressed intention, there has not yet been a law to rectify it despite discussion in Congress about fixing it.

Taxability of Expenses

Based on current guidance, we know that expenses associated with forgiveness are nondeductible. What is not clear is if they are nondeductible for 2020 tax returns or not until 2021 (or 2022) when forgiveness is determined.

This leaves timing the most significant question mark.

Forgiveness in 2021 (or 2022)

As detailed above, most borrowers are not likely to see their final forgiveness notification until 2021. If you file your 2020 return before forgiveness is determined, should you deduct the expenses related to the use of the PPP funds? Or do you disallow the deduction, assuming the loan ultimately will be forgiven? If you deduct the expenses, what happens when the loan is forgiven?

At this point, these questions are still unanswered. Taxpayers should consider filing extensions for their 2020 tax returns to hold off on filing until forgiveness is determined or potentially Congress acts to address this issue.

It is also important to note that you may have to file a tax return before you know the ultimate forgiveness amount depending on the timeline of your application and other factors including your fiscal year-end. In this case, there’s limited guidance available on the tax return reporting requirements.

Forgiveness in 2020

If you are able to apply and receive forgiveness in 2020, the answer on timing is simple. You have nontaxable income and nondeductible expenses in the same period for federal purposes based on current guidance.

All this uncertainty impacts tax planning, particularly estimated tax and extension payments for 2020.

Due to business disruption related to the pandemic, the considerations related to PPP addressed above, cash-flow constraints and uncertain current-year projected taxable deciding on estimated tax payments and ultimately an amount paid with your extension is more a moving target than ever.

Election Impact

An election year often creates uncertainty with tax planning.

If loan forgiveness produces taxable income through a reduction in deductible expenses, you’ll need to assess the year it’s taxable in and the respective tax rates, if different. Legislation that may provide the basis for determining answers to these questions may be delayed during an election period or during a change in administration. Filing an extension for 2020 may give you the opportunity to see the full impact of any planning.

Bank Covenants

How lenders view PPP loans may have a significant impact on financial covenants.

Accounting for a PPP loan as debt could impact your ability to meet certain covenants because the full amount of the PPP loan would be recognized as debt on the balance sheet and you won’t recognize the benefit of loan forgiveness income until the lender formally forgives the loan and the debt is extinguished.

If you have a bank loan with loan covenants, it is advisable to have a conversation with your bank about how you’re accounting for your PPP loan to better understand the ramifications in regards to your covenant, a waiver may be able to be obtained in advance. In most cases, companies received their PPP loan from their current lender.

Other Considerations

There are two additional considerations to keep in mind—record keeping and staying up to date with the latest information related to your forgiveness:

Record keeping

Up to date and thorough records are always a best practice – given the eyes that will be prying, it is of the utmost importance to keep records helping to prove to the SBA the necessity of your loan because the SBA has a five-year statute of limitations to reassess its forgiveness. The SBA has already said it will automatically review PPP loans over $2 million.

Up-to-date information

There is a significant calculation that goes into applying for forgiveness. It is important to keep up on the latest rules and regulations surrounding the program to be sure you are making decisions based on accurate data. The SBA is still releasing updates to its FAQ. Seriously, still.