Troubling Guidance from the Treasury Department
Everyone that has been involved with any part of Payroll Protection Program (PPP) loans knows that it is a process fraught with complication – rule changes, complex calculations, and mounds of paperwork. Additionally, behind the scenes, there has been a battle of the concept of Congressional intent vs. IRS Enforcement. When the CARES act was passed by Congress on March 27, 2020, their intent was the PPP funds would be tax free. This came to a head November 18th, with the release of Revenue Ruling 2020-27. With this ruling, the IRS is taking the controversial position that expenses paid with the PPP funds are not deductible on a 2020 return if forgiveness of the loan is reasonably expected to occur.
This means that if your financial statements currently contain expenses that you paid with PPP funds – and these funds are eligible for loan forgiveness – as the law stands, the expenses will not be deductible from your 2020 income. This is regardless of whether forgiveness is obtained by year end or not. This would impact most PPP recipients.
Revenue Procedure 2020-51 was additionally released and provides a safe harbor for those who guess wrong on the outcome of forgiveness. It provides procedures for correcting the mistake in either direction – for when a taxpayer assumes forgiveness and therefore does not deduct expenses and is subsequently denied, or assumes non-forgiveness and then later determines forgiveness.
Wheeler’s position is that if there is doubt about your forgiveness status, it is recommended that your return is extended until you are more certain.
The Silver Lining
Two United States Senators, Chuck Grassley (R) & Ron Wyden (D), released a statement November 19th stating that this guidance “misses the mark” on the spirit and intention of the PPP program per the CARES Act. They have indicated that they will continue their efforts to address this with year end legislation. While we are hopeful that the spirit of this law with regards to the deductibility of these expenses will eventually be realized, we need to stress that it is important to consider the rules as they stand today, and to be prepared for either outcome.
Wheeler Recommendations
As always, everyone’s situation will be unique. However, there are some common threads that are important to focus on considering this news.
- If you received PPP funds, you will want to be gathering the information required for calculating forgiveness – payroll records, proof of payment for rent, mortgages, utilities, retirement contributions, etc. – so you can have your forgiveness calculation determined as soon as possible.
- Your tax planning for 2020 will need to consider that this forgiveness will add to your taxable income for the year as the law currently stands. This means you will also want to have a good idea of your 2020 financial position, in addition to knowing your forgiveness calculation. This doesn’t mean that you need to write a check to the IRS just yet – you can work with your tax preparer on the best plan for you and your business.
Bottom Line
- If you received PPP funds in 2020 and are expecting full or partial forgiveness, you will want to understand how this impacts your 2020 taxable income.
- It is important that you gather your materials for your forgiveness application as soon as possible so you know where you stand.
- Your tax planning this year may involve multiple scenarios, and you will want to understand the potential impacts.
- Wheeler is here to help with any of the above! Contact your tax preparer directly or the PPP Team at ppp@wheelercpa.com.
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