In the original CARES act legislation, the intent was for the Paycheck Protection Program (PPP) forgiveness to be a non-taxable event. However, IRS has taken the position that the expenses assigned to forgiveness within the PPP forgiveness application submission will be disallowed, which effectively makes the PPP loan proceeds taxable.
This week IRS issued guidance that PPP borrowers should exclude the expenses from tax deductions when determining taxable income if those expenses are used to obtain forgiveness of their PPP loan. For the year-end 2020 if there is a reasonable expectation of forgiveness, regardless of whether the borrower files a forgiveness application in 2020 or 2021 the expenses submitted in the forgiveness application are non-deductible tax expenses regardless of when the actual forgiveness event occurs. If a PPP borrower has reasonable expectation of forgiveness, the ultimate forgiveness decision is not material to the decision analysis. The forgiveness determination is clear and definitive from the loan forgiveness procedures and application process. The IRS ruling specifically indicates that even if the borrower has not applied for forgiveness, the expenses are not deductible in 2020.
This ruling clarifies potential interpretations resulting from a lack of Congressional legislation. The IRS ruling eliminates ambiguity as to what expenses and when those expenses are non-deductible, and eliminates potential timing issues related to those expense deductions. If the PPP loan forgiveness application is subsequently denied entirely or partially the taxpayer may deduct the expenses for the portion not forgiven in the current year return if not filed, or file an amended return for the year submitted with non-deductible expenses.
As you face difficult decisions and situations in the weeks to come, we are prepared and ready to provide experienced analysis and advice. Please call us at 216.491.8300 if you need our assistance as we are here to help.
How to Apply for Loan Forgiveness