The good, the bad and the ugly of P3 loan forgiveness delays

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If getting a P3 loan approved meant you had to move at lightning speed, getting one forgiven may well make you feel like you’re stuck in slow motion.

This is the case of Andrew Cao, managing partner of Motoza, the Austin-based digital marketing agency he founded in 2011. Cao tapped into the Paycheck Protection Program – the 521 loan-and-return program. billion dollars designed to help small businesses weather the pandemic – in May, after some of its customers began pulling their businesses. He applied to a local lender, Horizon Bank, after failing to secure the first tranche of PPP funding with his company’s own bank, Bank of America.

“It was just a really bad experience, and unfortunately it must have been that way,” says Cao, who didn’t take the experience lightly. “We have been transferring money from BofA to Horizon for a few months,” he adds.

Applying for the loan forgiveness was much easier than applying for the loan, he notes, but he is still awaiting a decision on whether his company’s $ 72,500 loan will be canceled – nearly one month after filing. And he is not alone.

As of September 24, the US Small Business Administration had received just over 96,000 loan forgiveness requests, according to the testimony of SBA chief of staff and associate administrator for access to capital, William Manger. This represents only about 2% of the total loans granted. Manger, speaking ahead of a House subcommittee meeting, further noted that while no applications had been turned down so far, none had been fully approved either. The SBA has not provided a more recent update.

Delays, delays

While the SBA launched its online forgiveness portal on August 10, the same day Cao applied, the review process takes time, up to 90 days before the agency has to hand over anything. or to the lender. And the lender, who files the pardon application on behalf of the borrower, has 60 days before they need to submit anything to the SBA.

Borrowers themselves can request a discount at any time – even before the end of their PPP loan period. However, principal and interest payments are not due until 10 months after the end of the period covered. Currently, only eligible expenses such as payroll expenses and benefits can be forgiven. And only funds spent within the 24-week covered period are eligible for forgiveness. First-time P3 applicants may only have eight weeks to spend their P3 funds as the passage of the Paycheck Protection Program Flexibility Act extended the period covered for new borrowers. Eligible non-salary costs such as mortgage interest and certain utilities cannot exceed 40% of the total rebate amount.

This is how the program is supposed to work. In practice, some lenders are not even ready to receive PPP forgiveness requests, says LJ Suzuki, founder and CEO of CFOShare, a Denver-based financial and accounting outsourcing firm for small businesses. He adds that lenders are probably taking their time to get set up to avoid being overwhelmed by demands, as they were when the program was first launched. “They want to make sure all computer bugs are fixed,” he said. It is also hoped that Congress will pass some sort of general forgiveness bill that will allow automatic cancellation of loans under $ 150,000, but stimulus talks have stalled.

Namely, as of October 5, Bank of America’s online PPP forgiveness portal was still inoperative. At least one entrepreneur, Calloway Cook, who has attempted to apologize through BofA’s online PPP portal on multiple occasions, said he receives an error message with every attempt. Cook is the president and founder of Illuminate Labs, a dietary supplement testing company in Northampton, Massachusetts, which just launched in March. “It’s that stuff hanging over my head,” Cook says, referring to his $ 2,426 PPP loan. He has expressed concern that he will be inundated with interest charges if he cannot get his loan canceled before the 10-month moratorium on fees. “I am very knowledgeable about financial matters… I just want to finish this process. “

When asked about the status of Bank of America’s forgiveness portal, a spokesperson objected. He noted that the bank “communicates with customers and engages them in the forgiveness process”. He added that BofA has started sending full pardon requests to the SBA.

Suspended animation

While you can understand the caution on the part of the SBA and lenders – the launch of the PPP was indeed rushed and, therefore, chaotic – the problems with forgiveness delays are endless.

Importantly, it puts another level of potential financial pressure on businesses. To receive a full pardon, companies must maintain their workforce during the period covered and at the time of pardon. If this process were to be delayed, it will put businesses in an untenable position, says Jake McDonald, a former banker and current director of CBIZ, a national accounting and consulting firm based in Cleveland.

“We talk about it with businesses,” he adds. “They say, ‘Look, I’ve run out of PPP funds; I have to make personnel decisions. »Keep people on staff. And soon, he says, they’re going to have to let people go – with or without an answer on forgiveness.

The good news is that companies have until the end of the year to bring people back – assuming they can rehire former employees or hire skilled workers the same way – while still being entitled to forgiveness. But that still puts them in a bind, adds McDonald. “It creates a lot of additional administrative tasks and associated costs. “

It also creates potential tax headaches, says Graham Simmons, co-chair of the business law group at Norris McLaughlin, a regional law firm serving businesses in New Jersey, New York and Pennsylvania. For starters, he notes that interest charges – and how to treat them fiscally – become something of a wild card if forgiveness is delayed. While the interest charges – which reach 1% on the unsatisfied portion of PPP loans – and payments can be deferred for up to a year, interest charges start to add up from day one. So even if you expect your loan to be canceled entirely, you still accrue interest charges just like you would on a regular loan. And after 10 months, Simmons says, some businesses may have to start making interest and principal payments on a loan that will eventually be canceled.

Simmons adds that this places business owners in the strange territory of potentially claiming interest expense deductions on a loan that will ultimately be canceled. Interest charges that accrue on the canceled portion of the loans should be returned to the lenders. He notes that, at the moment, there is no guidance from the SBA or the IRS on how to deal with the predicament – and that makes all trouble.

Even so, waiting to apologize might not be such a bad idea, Suzuki says. “I intentionally advise my clients not to get their loan canceled in 2020.” The reasons have to do with the deductibility of PPP expenses. While a business owner can normally spend the cost of employee salaries, the IRS has noted that if those funds are paid by canceled P3 loans, the expenses are no longer deductible. It would be considered a double soak. In other words, if you delay the forgiveness process until 2021, he believes, you can deduct the cost of expenses that are paid by the PPP loans that would be forgiven that year, which reduces your liability and should improve your cash flow in 2020, when you likely need it most. “As a business owner, that means you get an extra year to have that money in your business,” he says.

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