In response to economic devastation resulting from the COVID-19 pandemic, the federal government created the Paycheck Protection Program (PPP) to help small business owners remain open. This program’s funds were to be used to pay employees and cover costs associated with remaining in business. A unique feature of this program was the ability to have some or all of the debt forgiven as long as the borrower provided their lender and the SBA with proof the proceeds were used as required in the approval guidelines.
Over time, PPP was undergone several changes with regards to both approvals and the forgiveness process. The original approval process was cumbersome and placed a significant burden on both the borrower and the financial institution that made the loan.
Originally what contributed to the complexity of the forgiveness process was the amount of paperwork that had to be submitted that had to be backed up by numerous forms and supporting schedules/records by the borrower. These would literally result in a package which that would literally fill boxes if filed by paper or a considerable amount of files if filed electronically.
Once these files were received, the lender had to complete its review within 60 days of receipt of the request. Then the SBA would have 90 days to conduct its follow-on review to determine if the loan would be forgiven in full, in part or declined.
To reduce the documentation burden for businesses and reviewers, the SBA issued the 3508 “EZ” form in concert with opening their forgiveness application portal in mid-August. The “EZ” form created some “safe harbors” that enabled applicants to file via a less complicated process. In addition, borrowers were required to provide fewer supporting documents to their lender. However, for many smaller borrowers and lenders, even the “EZ” process was still viewed as overly burdensome and, as a result, few forgiveness applications were processed.
Following a concerted effort by banking and small business trade organizations, the SBA made additional changes to the forgiveness process. The most significant change was tailoring the applications specifically to those loans of $50,000 or less. This latest version further reduced the paperwork requirements and could be available to 70% of all approved PPP applications. However, even with the simpler process, borrowers were required to compile documents related to verification of eligible payroll and non-payroll expenses, bank statements, tax filings, and would be required to retain this information for at least 6 years after the PPP was either forgiven or paid in full. This was viewed as a good first step to help smaller business borrowers, it still fell short of the hoped-for debt forgiveness threshold sought by many.
Finally, two items about the forgiveness process must be noted. First is the critical role the lender has in the forgiveness process. PPP recipients must have a strong relationship with their lender and learn everything about the process. Lenders can interpret SBA guidelines as they build their own forgiveness portals. Also, lenders have the authority to add their own requirements to the forgiveness process. Given the potential for future changes to the forgiveness program, many lenders have yet to fully-activated their forgiveness portals.
The second item is that the IRS has not changed its earlier guidance that payroll and non-payroll expenses forgiven via the PPP process cannot be deducted from the borrower’s tax return. Therefore, it is highly recommended that your clients seek input from their tax advisers to evaluate the potential impact on taxable income.
Your Small Business Development Center will continue to provide timely, unbiased information on the PPP and other issues that impact small businesses. Should questions arise, please go to www.hrsbdc.org or www.virginiasbdc.org for further assistance/information.
Mike Austin is a retired small business lender with over 30 years’ experience in SBA loan-guarantee programs. Since the COVID-19 Pandemic, he has been working for the Small Business Development Center of Hampton Roads and the Virginia SBDC Network under a grant from the TRUIST Foundation.