SwenAssurePPP - December 15, 2020 Update
The Small Business Administration (SBA) has issued further guidance since the Paycheck Protection Flexibility Act was signed into law on June 5, 2020. Highlights since our November 16th update are as follows:
With the establishment of the PPP as part of the CARES Act, it was generally understood the loans would not result in taxable income when forgiven. In April, however, the IRS provided guidance in Notice 2020-32 that certain otherwise deductible expenses incurred in a taxpayer’s trade or business would not be allowed as a deduction if those expenses are applied to the forgiveness of a covered loan. This position effectively results in the loan becoming taxable since the proceeds are offset by the expenses used to obtain forgiveness.
While this has been acknowledged as a continuing problem since April, none of the subsequent modifications and refinements to the PPP program have addressed the IRS deductibility position.
On November 18, 2020 the U.S. Treasury Department and the IRS confirmed the previous notice as to the deductibility of expenses and provided further guidance.
- Under Revenue Ruling 2020-27 a taxpayer that received a PPP loan and used the funds for covered expenses may not deduct those expenses in the taxable year in which the expenses were paid or incurred if at the end of the taxable year the taxpayer reasonably expects to receive forgiveness of the loan, even if the taxpayer has not yet submitted the forgiveness application.
- Revenue Procedure 2020-51 provides a safe harbor allowing a taxpayer to take a 2020 deduction if that return is unfiled and the taxpayer receives notification that all or part of the PPP loan will not be forgiven, but only to the extent not forgiven. The safe harbor is also applicable if the taxpayer decides to not ask for PPP loan forgiveness. A taxpayer can file an amended 2020 return reflecting deductions for amounts not forgiven.
The AICPA and numerous trade groups and associations are lobbying Congressional leaders to pass legislation this year to reverse IRS position and confirm the original intent that the loans become tax free when forgiven. Stay tuned.
Forgiveness is not guaranteed and must ultimately be approved by the Small Business Administration.
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