Update: January 7, 2021 – The Treasury Department and the IRS issued guidance today allowing deductions for the payments of eligible expenses when such payments would result (or be expected to result) in the forgiveness of a under the Paycheck Protection Program (PPP).

IRS STATES BUSINESS OWNERS CAN’T DEDUCT EXPENSES PAID WITH PPP LOAN

On November 18, 2020, the IRS provided a ruling on deductions regarding the Paycheck Protection Program (PPP) loan (Rev. Rul. 2020-27). Per the ruling, the IRS confirmed and clarified that taxpayers whose PPP loan status is forgiven, will have it forgiven, or ‘reasonably expect’ to have their loan forgiven, may not deduct expenses paid with those funds, even if forgiveness has not been granted by the end of the taxable year. Although forgiveness is tax-free, taxpayers can’t deduct expenses that were covered by the loan.

HAVE YET TO APPLY OR DENIED FORGIVENESS?

Accompanying the ruling was (Rev. Proc. 2020-51), which allows taxpayers who do not apply for or do not receive forgiveness, partial or all, the ability to take deductions for amounts paid using PPP loan proceeds, which were not forgiven.

UNDERSTANDING TIMELINES – WHEN TO MAKE TAX ADJUSTMENTS. EXAMPLES:

  • If the taxpayer has applied for forgiveness but does not receive forgiveness until 2021, the IRS has indicated the taxpayer will still make the tax adjustment for 2020.
  • If the taxpayer does not apply for forgiveness until 2021 and receives it in 2021, tax adjustments will still occur in 2020.

Simply put, the taxpayer will have to make a tax adjustment for the amount of PPP that is forgiven in 2020.

SHOULD BUSINESSES APPLY FOR FORGIVENESS TODAY?

There is no harm or risk in filing for forgiveness today; however, there is reasonable logic to wait for now. Congress is still debating legislation regarding the deductibility of forgiven expenses, and there is an intention to reverse the ruling by year-end per Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.). Both Grassley and Wyden released a joint statement criticizing the IRS’s position shortly after the ruling.

Of course, if forgiveness has already been received or is pending approval, a change in ruling would not affect a taxpayer’s forgiveness in any way.

If you’re interested in learning more about PPP loan forgiveness or to request additional deduction guidance, please contact a Bank of Southern California Banker today.