When Should You Submit Your PPP Loan Forgiveness Application, Earlier or Later?

By Joshua Prince, CPA, MST - Manager
November 16, 2020

The Paycheck Protection Program (PPP), a program that provided small-sized businesses with funds to pay up to 24 weeks of payroll and other nonpayroll business costs, officially closed to new loan applications on August 8, 2020.

The Small Business Administration (SBA) began accepting PPP loan forgiveness applications from lenders on August 10, 2020. In order to be eligible for loan forgiveness, borrowers must submit a PPP loan forgiveness application (Form 3508, 3508EZ, or 3508S) within 10 months after the last day of the Covered Period (between 8 weeks and 24 weeks after the date PPP funds were received) before any loan repayment begins. For example, a borrower who received PPP funds on May 1, 2020 and is claiming a covered period of 24 weeks, ending on October 15, 2020, has until August 14, 2021 to apply for loan forgiveness before loan repayment begins.

The SBA allows lenders 60 days to complete its review of a PPP loan forgiveness application before issuing a decision to the SBA. Then, the SBA will, subject to any review of the forgiveness application, issue the appropriate forgiveness amount to the Lender within 90 days. Borrowers who received $2 million or more will be subject to a “full review” before the loan can be forgiven, according to the Department of Treasury.

For many borrowers who received PPP funds, the big question remains “When should I submit my PPP loan forgiveness application, earlier or wait until the application due date (i.e., 10 months after the end of my Covered Period)?” We discuss several issues below that may impact your decision about when to apply for PPP loan forgiveness.

  • Results of the 2020 U.S. Elections: Control of Congress and congressional changes to the PPP forgiveness rules may impact when you want to submit your forgiveness application. For example, Congress may decide to provide automatic forgiveness to certain borrowers (i.e., under $150,000).
  • Deductibility of payroll and nonpayroll expenses covered by the PPP loan: When Congress passed the Cares Act, they intended for the loan forgiveness to be excluded from taxable income. However, the Department of Treasury released guidance that while the loan forgiveness income is tax-exempt, the businesses cannot deduct the expenses used to claim forgiveness. This guidance has the effect of making the forgiveness taxable since a reduction of expenses results in higher taxable income. However, there has been no guidance on when the timing of the expense reduction will occur, either the year the loan is forgiven or the year the expense was paid. Prior to the election, there was talk about Congress “fixing” this provision when they issued an additional stimulus package. Some businesses may want to wait until there is additional clarification.
  • Length of Covered Period: A borrower can apply for full loan forgiveness after all PPP funds are spent on eligible payroll and nonpayroll costs. A shorter covered period of 8 weeks adds pressure to the borrower to spend those PPP funds in a shorter time frame, whereas a 24-week Covered Period allows the funds to be spent over a longer period.
  • Financial Reporting: The earlier a borrower submits a forgiveness application and receives SBA approval of loan forgiveness, the earlier the borrower can remove the corresponding PPP debt from the books and any financial statement.
  • Eligibility for the following full time equivalent (FTE) reduction safe harbor rules or FTE reduction exceptions may encourage borrowers to file for forgiveness earlier. 
    • Safe Harbor #1: Borrower was unable to operate at the same level of business activity as before February 15, 2020 due to compliance with the CDC, OSHA, HHS, or other state and local guidelines or orders related to COVID-19
    • Safe Harbor #2: Borrower restored employee hours by December 31, 2020 or earlier
    • Reduction Exceptions:
      • Employee will not agree to restore hours
      • Employee fired for cause
      • Employee voluntarily resigned
      • Employee requested reduction in hours
      • Borrower unable to hire similarly qualified employee by December 31, 2020 or earlier.
  • Eligibility for the wage or salary reduction safe harbor should encourage borrowers to file earlier.

The loan forgiveness rules and application are complex. We encourage you to consult with your MichaelSilver advisor and our CARES Act Team for questions about completing and submitting your PPP loan forgiveness application. We can be reached at 847.982.0333.