IRS and SBA Issue Updates on PPP Forgiveness and Deductions
We wanted to share some guidance issued on November 18 on the deductibility of expenses related to Paycheck Protection Program (PPP) loans that have not yet been forgiven. The guidance is welcome news as we approach year-end and the focus shifts to tax projections and planning. Implemented as part of the CARES Act, the PPP program provided businesses with loans which were forgivable if they were used for specified business expenses (primarily payroll, rent and utilities). What was left ambiguous was how to treat these expenses for tax purposes. Would they be deductible although the PPP loan amount forgiven was not considered income? The new guidance issued on November 18 provides some answers. The guidance issued considers two scenarios:
Scenario 1 involves a taxpayer who received a PPP loan during 2020 and incurred eligible expenses during the covered period (the 8 or 24 week period from the date the loan was received). The taxpayer applies to the lender for forgiveness of the PPP loan and believes based on eligible expenses it paid during the covered period that it satisfied all requirements for complete loan forgiveness. However, the lender does not inform the taxpayer whether the loan will be forgiven before the end of 2020.
Scenario 2 involves a taxpayer who also received a PPP loan during 2020 and incurred eligible expenses during the covered period. However, in this scenario, the taxpayer does not apply for forgiveness until 2021. The taxpayer in this scenario still expects to meet the requirements for complete loan forgiveness.
In both scenarios above, the expenses related to the PPP loan should NOT be deducted on the taxpayer’s 2020 tax return. The deciding factor in both scenarios is that the taxpayer reasonably expects to receive forgiveness. The guidance that was issued further stated that taxpayers may later deduct previously non-deductible expenses if their forgiveness application is denied in whole or in part, or decide not to seek forgiveness. Of course, the situation regarding the pandemic, government stimulus, etc. is extremely fluid and we anticipate more guidance being issued. As always, we will do our best to keep you up to date with the guidance issued and how it impacts you.
We hope that you found this article helpful. And again, we are available if you have questions, concerns or need assistance.