By Marilou C. Vroman, CPA, CFE
As quoted by James Paxman, “The early bird gets the worm, but it’s the second mouse that gets the cheese.”
As many businesses have or will be approaching the end of the 24-week covered period, thoughts are turning towards whether or not now is the right time to apply for forgiveness. While many dealers are anxious to move forward and get the process over with, each dealer’s situation is unique, and the optimal timing to apply for forgiveness should not be a “one size fits all” answer. There are several variables to consider prior to making the decision to hit the “submit” button on your forgiveness application.
One key consideration since the PPP program’s inception, is the passage of time has yielded increasingly “favorable” terms for PPP loan recipients qualify and apply for forgiveness. These terms include items such as the extension of the covered period from 8 -weeks to 24-weeks, reduction of the minimum payroll cost threshold from 75% to 60%, clarification of additional qualified expenses, and simplified forgiveness applications. If a dealer opts to apply for forgiveness today, the guidance in place as of today is what will be considered. So, why rush the application if there are ten months after the end of the covered period to apply, and the rules of forgiveness may continue to change in your favor? Here are few additional items to consider:
PPP funds fully utilized - Have all of your loan proceeds been used in full for covered expenses?
Headcount reductions – Has your headcount been reduced to the extent your potential forgiveness amount will be reduced by the FTE reduction quotient? (Essentially your headcount percentage during the covered period as compared to pre-Covid periods.) Is it possible your headcount will be partially or fully reinstated to pre-Covid levels by 12/31/20?
Deductibility of expenses – Contrary to Congressional intent, the guidance in IRS Notice 2020-32 essentially stated no tax deduction would be allowed for an otherwise deductible expense if payment of the expense resulted in forgiveness of the loan. If the loan has not yet been forgiven, the related expenses should be deductible as normal for 2020. We suggest applying for an extension either way to avoid having to amend the 2020 tax return.
Is your lender ready? - We certainly do not recommend waiting to the last minute, but it could make sense to apply for forgiveness once your lender has gained experience with the process. A later application may be more efficiently processed with less back and forth questions and ultimately save you time in the long run.
Whether you choose to be the first bird, or second mouse is entirely up to you. In theory, the outcome should be the same, but patience could very well pay off. What you should be doing now is ensuring your supporting documents and reports are in order such as payroll records, cancelled checks, rental agreements, and utility bills etc. Be ready to apply but wait to hit “submit” button until the time is best for you and your dealership.