The next few weeks are year-end financial and tax planning time for a lot of Wisconsin farms. It is the time to gather all the receipts and documentation needed for the accountant or tax preparer. Farms that obtained a Paycheck Protection Program (PPP) loan through an independent lender, administered by the Small Business Administration (SBA), may also find this to be a good time to review the application steps for PPP loan forgiveness.
The CARES Act allowed SBA, through the Paycheck Protection Program, to provide potentially forgivable loans to small businesses. These loans covered eligible payroll costs and/or self-employment income along with other allowable expenses during the COVID-19 pandemic. This program expired on August 8, 2020.
What farmers need to consider
Three things farmers should consider for PPP loan forgiveness:
- The deadline to make an application for forgiveness,
- How to make an application (including which application form to use), and
- How does forgiveness or potential forgiveness impact your tax planning for 2020.
The Paycheck Protection Program allowed for loan proceeds to be spent over a 24-week covered period. Many of the early loans were based on an eight-week period, but there was a change in June that allowed the period to be extended to 24-weeks and allowed early borrowers the option to select the covered period of eight or 24 weeks.
This covered period begins on the loan disbursement date, which is when the funds were placed into the borrowers account by direct deposit. Borrowers have 10 months from the end of the covered period to make an application for forgiveness. Extension has created an online spreadsheet tool to help farmers determine their application deadline. Farmers will need to know the disbursement date that the loan funds were placed into their account.
Steps for loan forgiveness
First, borrowers should contact their lender to discuss which forgiveness application form is needed. The lender may have developed their own application form, so this is an important first step. The second step is to gather all the information and documentation needed to complete the application. A SBA PPP Forgiveness Factsheet provides a list of the needed documentation. Borrowers should submit the completed form and documentation to their lender. The PPP Loan Forgiveness: Which Form Should I Complete Quiz is an educational resource developed by Liz Binversie, Brown County Agriculture Educator for UW-Madison Division of Extension, and is based on the SBA Factsheet to help farmers learn which application may fit their set of circumstances.
Expenses and loan forgiveness
As with several government programs during the COVID-19 pandemic, rules and guidance on these programs are always evolving. On November 18, 2020 IRS issued Rev. Ruling 2020-27 directing that a taxpayer who received a PPP loan and paid allowable expenses with the loan proceeds will not be able to deduct these expenses. The guidance provided by IRS indicates expenses should not be deducted if the taxpayer has applied or if the taxpayer reasonably expects to receive forgiveness of the PPP loan. IRS rules specify forgiven PPP proceeds will not be included in taxpayer’s gross income and expenses paid with forgiven proceeds (such as payroll costs) will not be deductible, ultimately avoiding a double tax benefit.
However, if a farm business is not through its covered period of 24 weeks, and is not sure what expenses will and will not be forgiven, how does a farmer provide accurate information to their accountant or tax preparer in preparation for their 2020 taxes? The first recommendation is to discuss this issue with an accountant or tax preparer for guidance. If a loan hasn’t yet been forgiven, the expenses remain deductible. Though the PPP proceeds that are later forgiven could trigger the recovery of these expenses, resulting in income that must be recognized and a future tax liability. There may be reasons to wait until 2021 to apply for PPP loan forgiveness, such as determining the optimum amount and mix of allowable expenses that will be non-deductible. Discussing the forgiveness application in tandem with tax preparation will be important for this unprecedented year.
Dec. 11, 2020 webinar
More information and guidance will be shared during the What Farmers Need to know about PPP Loan Forgiveness webinar on December 11, 2020. Farmers can register online; for more information about the meeting, please contact Joy Kirkpatrick at firstname.lastname@example.org or Katie Wantoch at email@example.com.
Neiffer, Paul. IRS Formally Denies PPP Expense Deduction (But it May Mean Nothing). November 18, 2020. Agribusiness Blog: Farm CPA Today.
Land Grant University Tax Education Foundation, National Income Tax Workbook 2020, p. 559. Wisconsin Annual Income Tax Course by Iowa State University.