Earlier this week, Treasury and the SBA issued a 10 page FAQ on loan forgiveness. Congress is also considering another stimulus act.
The Good News
In general, payroll costs paid or incurred during the covered period may be forgiven. Payroll costs are subject to two limitations: one based on a reduction in FTEs; and, a second based on a reduction in salary and wage rates.
The final question of Tuesday’s FAQ greatly reduces the impact of the second limitation. Basically, bonuses and commissions paid during the lookback period do not hurt the borrower. Only reductions in excess of 25% in an employee’s base salary or wage rate are penalized.
However, bonuses and commissions paid during the covered period are still included in forgivable payroll costs up to the applicable $100,000 prorated limit – $15,385, $20,833, or $46,153.
This interpretation will allow many more borrowers to use the “EZ” form and will simplify the forgiveness calculations for many others.
The Bad News
Even though the SBA may be opening their Loan Forgiveness Application Portal to lenders on August 10th, most lenders will not be accepting applications until September or later. In addition, the SBA may delay the opening of the portal since the legislation currently before Congress would substantially affect the loan forgiveness process. It is unclear whether any legislation will pass in the next few days or perhaps not until after Congress’s August recess.
We still believe that most borrowers will not be applying for loan forgiveness until at least October. Even if we get a stimulus bill this weekend, it will take Treasury and the SBA a few weeks to issue guidance. So, for the moment, you should still plan on completing your third quarter payroll tax return before filing for loan forgiveness.
Oh, What a Surprise, Not!
As we mentioned in our last post, The Paycheck Protection Program Flexibility Act, H.R. 7010, created a new FTE safe harbor for businesses that are not able to return to their prior level of activity by 12/31/2020 based on federal COVID-19 rules or guidance. In California, most non-essential businesses will qualify for this safe harbor because of the “Safer at Home” orders. Essential businesses may have more difficulty qualifying. Unfortunately, no further guidance has been issued by Treasury or the SBA.
We are also not surprised that the taxability of loan forgiveness is still unresolved. Clearly there is bicameral and bipartisan support to specifically overrule IRS Notice 2020-32 and allow both tax free loan forgiveness and full deductibility of the forgiven expenses. However, its inclusion in the next stimulus bill is not certain.
While the Acts currently before Congress will almost certainly result in even greater loan forgiveness, many questions remain unanswered. If you would like assistance, please contact one of your team members here at LSL.
We will keep you posted if we receive any additional significant guidance from Treasury and the SBA.
Dave focuses on tax compliance and planning in the areas of income and estate tax. He is the tax partner for our automotive group but he’s also tapped for his expertise in real estate, manufacturing and professional services. He’s a whiz at estate and gift taxation and can create a customized approach to designing and implementing a successful exit plan for business owners.
You can reach Dave at 714-672-0022.
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