In this article we dive into all the specifics regarding PPP Loan forgiveness and we will continue to advocate on your behalf for forgiveness applications.
As the economic consequences from the pandemic continue, we are pressing for more aid at every level of government, especially during this stage when businesses are required to restrict activities.
Taxation of PPP Loan Forgiveness
In early 2020, many of you took advantage of the Paycheck Protection Program (PPP) that the Coronavirus Aid, Relief and Economic Security (CARES) Act created. As we approach the end of 2020, one very important item to keep in mind are implications of the PPP loan that you may have received.
When the U.S. Congress passed the CARES Act, the Act provided that the loan amount forgiven was to be excluded from taxable income. Generally, when a debt is cancelled, IRS code requires that the amount of the debt that is cancelled is treated as taxable income unless excluded by a specific tax code. Although the CARES Act noted that the amount of PPP loan that is forgiven is not taxable income, it did not address whether the expenses paid using the PPP loan funds is deductible to extent of the loan that is eventually forgiven.
Recently, under Internal Revenue Code Section 265(a)(1), the IRS has clarified that no deduction will be allowed for amounts paid using PPP loan funds that are eventually forgiven. The effect of this is that the amount of the PPP loan that is forgiven increases your taxable income by the amount forgiven and the offsetting expenses are not deductible. While there could be future legislation that changes this ruling, the rules as they stand today provide for no deductions for expenses paid for using PPP loan funds that is eventually forgiven.
Need Help with PPP Loan Forgiveness?
An important nuance to this is contained in IRS Revenue Ruling 2020-27, which provided that eligible expenses paid for using the PPP loan funds are not deductible in the year paid if at the end of that year the taxpayer reasonably expects to eventually receive loan forgiveness. To the extent that a taxpayer reasonably expects that the PPP loan will not be forgiven, items paid with the proceeds of the non-forgiven PPP loan are deductible. In this ruling the IRS provided two examples in which the taxpayer received PPP loans and used the loan proceeds for qualifying expenses in 2020. In first example, the taxpayer applied for loan forgiveness in November of 2020 but had not been informed by the lender by the end of 2020 whether the loan was forgiven. In the second example, the taxpayer had not applied for the loan forgiveness by the end of 2020 but knew the amount of expenses that qualified for the forgiveness. Because the taxpayers under both the examples reasonably expected for the PPP loan to be forgiven, no deductions for the expense would be allowed.
Would you like to learn more about how we work and how to file for your PPP Forgiveness? We invite you to take a tour of our services. But right now, let’s start with your taxes.
Let’s talk soon. To the books!