Coronavirus (COVID-19): PPP Forgiveness and Tax Treatment + EIDL Advance

We wanted to give you an update to the PPP forgiveness as well as tax treatment of both the PPP and EIDL.

With another Coronavirus relief bill possible to happen at some point, know that there may be changes to the way things currently stand.

With that being said, what we outline here is the way things are today but we will be sure to let you know if anything changes.

Paycheck Protection Program (PPP) Forgiveness

The SBA is accepting forgiveness applications for the PPP loan.

• This process must be done through the bank you received your loan from. Be sure to reach out to your banker to ensure they are accepting the forgiveness applications currently and exactly what they need from you. They will more than likely give you the form along with a list of requested docs they need to complete the process.
• There are three application types: Form 3508 requires the most calculations, Form 3508EZ requires less calculations and Form 3508S requires close to zero calculations. Lets dive into these:
• PPP Forgiveness Application – Which form should I use?
  • Form 3508S – Simplified form for those with a loan less than $50,000. In this form you do not need to “show your math” you simply do the computation of the forgivable amount on your own and and report it on the application. If you are using this form you are NOT subject to the salary or full-time equivalent reduction requirements.
    • Download Form 3508S Here
    • Download Form 3508S Instructions Here
  • Form 3508EZ – Available to those that are self-employed with no employees OR those who did not reduce employee salaries by more than 25% and did not reduce employee hours OR those who reduced business activity due to COVID health guidelines and did not reduce salaries by more than 25%.
    • Download Form 3508EZ Here
    • Download Form 3508EZ Instructions Here
  • Form 3508 – For those who do not qualify to use Form 3508S or 3508EZ. This form is the most complicated,requiring various calculations around eligible costs, salary or hour reductions, etc.
    • Download Form 3508 Here
    • Download Form 3508 Instructions Here
• Once the bank receives the application they have 60 days to review it and then the SBA has another 90 days to review.

Paycheck Protection Program (PPP) Tax Treatment

PPP Forgiveness is not taxable but… expenses are not deductible.

• PPP forgiveness does NOT trigger cancellation of debt meaning that the actual forgiveness of the loan is not taxable.
• However, here is where things get a little sticky. The expenses for the items that are being forgiven (payroll, rent, utilities, etc) are not deductible per the IRS.
• Example: You got a PPP loan for $40k, used all of the funds for payroll, and then got the full loan forgiven. You do not need to report income of $40k forgiven, however the $40k you spent on payroll (or other eligible costs) for that forgiven amount is not deductible.
• This may come as a surprise to some and may be a little frustrating. This is one item that has been addressed in various relief bills that have come to the table but nothing in this area has been passed yet. There is a lot of push for the IRS to reverse this and allow expenses for the items forgiven.

Economic Injury Disaster Loan (EIDL) Advance Tax Treatment

The EIDL was a loan offered by the SBA for businesses suffering from the pandemic. As part of the EIDL loan there was an advance that was available which was technically a grant, up to $10k in value.

• Since this advance is considered a grant it is not part of the loan that needs to be repaid. Many businesses just received the grant, with no additional loan.
• There is still no formal guidance from the IRS on whether this specifically will be taxable, however we are assuming it will need to be included in your taxable income.
• Previously they have made it clear that forgiven SBA loan amounts need to be included as other income.
• For the time being, assume the grant will be taxable and should something change, great!

Hopefully that is helpful and gives you a good idea on where things stand as it comes to both the PPP loan and the EIDL advance.

As mentioned there have been talks of an additional COVID-19 relief package being passed which may very well change some of the information addressed here however as of now nothing has been agreed upon or passed by Congress.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.