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What you need to know about PPP loan forgiveness

SBA administrator Jovita Carranza (left) met with business owners in Boston recently to discuss the Paycheck Protection Program.Jonathan Wiggs/Globe Staff

Since March, millions of small businesses have obtained forgivable loans through a key federal program to help meet payroll and other basic expenses. It’s been a life-saver for many of them during the economic meltdown caused by the pandemic. It has also helped millions of workers stay on the job with a steady paycheck. Now many businesses are grappling with the process for having their loans forgiven and with how to account for the loans on their tax returns. The following is drawn from the websites of government agencies and law and accounting firms.

Q. I received a loan under the federal Paycheck Protection Program. I’m starting to think about my 2020 federal taxes. Are my loan proceeds taxable?


A. Probably not. But there’s a lot unpacking to do before addressing some tricky questions of timing. The program, part of the $2 trillion CARES Act, was passed by Congress and signed into law by President Trump within weeks of the COVID-19 outbreak. The government wanted to get a lot of cash out the door very quickly by allowing small businesses (generally, those with fewer than 500 employees) and nonprofits to obtain forgivable loans to keep employees on the job. It also allowed businesses to pay some overhead costs, such as rent, mortgage interest and utilities, with the loans.

Q. “Forgivable,” as in I don’t have to pay back what I borrowed?

A. Yes, 100 percent of the loans (principal and interest) are eligible to be forgiven, so long as employers used the money to maintain their payrolls at about the same levels as before the outbreak and are able to document that the money was spent within PPP guidelines. The program closed to new applications in August, after parceling out $350 billion. And with $130 billion in the program still untouched, it’s possible the program could be revived.


Q. Not only payroll, but some expenses are forgivable?

A. Yes. In fact, the terms for allocating loan funds between payroll and expenses changed under the Paycheck Protection Program Flexibility Act, which became law in June. Now businesses can spend up to 40 percent of their loan proceeds on expenses, as opposed to payroll (which includes wages and benefits, but not payments to independent contractors). Previously, 25 percent was the limit on expenses.

Q. How do I get approval for forgiveness?

A. Business borrowers have up to 10 months after spending the loan proceeds to apply for forgiveness. Many businesses stressed out by the pandemic may need most or all of that time to gather documentation and submit an application, which means forgiveness won’t come until 2021.

Q. To whom do I submit my application?

A. The loans, while 100 percent federally guaranteed, were made by private banks or other lending institutions. File your application with your lender. An employer who has spent the entire loan proceeds on payroll or allowable expenses and has documentation can file immediately.

Q. My lender has full discretion to approve forgiveness?

A. No. Your lender must get approval of the Small Business Administration, which is administering the program on behalf of the Treasury Department. Your lender has 60 days to review your documentation before submitting it to the SBA.

Q. What is the scope of the SBA reviews?

A. Areas of review include eligibility, need, calculation of the loan amount, use of loan proceeds, and the calculation of the loan forgiveness amount. The SBA has said it will automatically review loans over $2 million and reserves the right to reassess its forgiveness of any loans for up to five years.


Q. How long does the SBA have to review my application?

A. The SBA has 90 days to notify your lender of its decision and to release funds to your lender to cover the loan (or part of it), if approved.

Q. I have already received loan forgiveness or expect it before Dec. 31. How do I treat the loan proceeds for taxes?

A. The loan amount is nontaxable income. (Ordinarily, cancellation of debt is considered to be income, but not in this case.) If you used a portion of your loan to pay expenses (rent, mortgage interest, utilities) and that loan has been forgiven, you cannot deduct those expenses. (That would be double-dipping.)

Q. What if I don’t receive forgiveness by year’s end, which is likely for many borrowers?

A. The loan amount remains nontaxable, pending approval. But whether to deduct expenses can be a tricky question. If you deduct expenses you can’t also expect to have that portion of your loan forgiven. That’s clear. But what if you don’t deduct, and forgiveness of that portion of your loan is not approved next year? You may have missed the opportunity to deduct those expenses on your 2020 tax return while awaiting a decision on forgiveness. That’s the dilemma. One option is to file for an extension for your 2020 taxes in order to wait for a forgiveness decision. Delay may also allow time for Congress to clarify this issue. You could also look into later filing an amended return.


Q. What forms do I need?

A. There is a full form, an EZ form, and a form for loans of $50,000 or less, Form 3508S. The 3508S is intended to make the process less administratively and financially burdensome. All the forms require businesses to make certifications and submit documentation.

Q. What happens if my loan is not forgiven?

A. Your outstanding balance will continue to accrue interest at 1 percent, for the remainder of the five-year term of the loan.

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