The economic ramifications of the COVID-19 pandemic have been turbulent at best. As the pandemic drags on with no signs of slowing, many businesses have had to seek out assistance from the Small Business Administration to stay afloat. As a response to the COVID pandemic, the CARES Act from March 2020 provided various programs like the Paycheck Protection Program (PPP) to help businesses maintain their workforce and keep the lights on. From Congress’ perspective, Republicans wanted to keep money flowing to businesses to help weather what was intended to be a short suspension of economic activity and keep workers off of unemployment. However, as businesses moved forward to take advantage of the relief, there was little consideration in regard to how this would affect their tax situation. Most notable is how the forgiveness of PPP loan funds is impacting our clients’ deductions and taxable profit.
Overview of the PPP
Just to dial it back a bit, the Paycheck Protection Program was designed to help small businesses maintain their payroll and pay for business expenses. It was a low-interest loan, and payments were deferred for six months. Small businesses that utilized at least 75% of proceeds for payroll were eligible for loan forgiveness. The cutoff to apply for PPP was in August 2020.
The Trouble with Loan Forgiveness
Loan forgiveness sounds all fine and dandy until you take into consideration the tax ramifications. While the loan forgiveness is not considered income, the expenses that were paid using the proceeds of the loan are not considered tax deductible. This increases the taxpayers’ taxable income, and therefore, could increase their tax bill. The IRS began issuing notices in May 2020. IRS Notice 2020-32 stated that covered expenses paid with PPP proceeds would not be tax deductible. In November, IRS Notice 2020-27 clarified the Internal Revenue’s position on the matter, reiterating that expenses that were paid from PPP funds are not deductible and that if loan forgiveness is foreseeable in the future, the taxpayer may not deduct the expenses on their 2020 tax return.
What If Loan Forgiveness Is Denied?
If loan forgiveness is denied and repayment must take place, the taxpayer has a couple of options. According to the IRS Revenue Procedure 2020-51, the taxpayer may either amend their 2020 tax return if it has already been filed or include the deductions on their current year’s tax return. A notice must be included outlining the details of the PPP funds received. This is a critical point and should be taken into consideration in any compliance discussion with regard to taxpayers’ annual report of income on Forms 1120, 1120S, and/or 1065s.
The effects of the PPP have caught many off guard, including business owners, tax professionals, and even members of Congress, who have stated that this was not the intent of the CARES Act. While there are a lot of uncertainties surrounding this pandemic, one thing for certain is that things are constantly changing and being updated as government officials attempt to combat the economic effects head on. Moving forward, there could be more changes addressing the current position of the IRS. We are paying close attention to the latest and will update you accordingly.
Get Help with Your Taxes
This year has been a whirlwind. With the holidays looming, your taxes may be the furthest thing from your mind. We know it’s a busy time of year, but getting a head start on your taxes is always a good choice. The tax experts at Tax Hack are here to help. Schedule a strategy session today! For more information on PPP loans and other tax tips, subscribe to our newsletter below.