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IRS Issues Tax Guidance on PPP Loans

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The Treasury Department and the IRS have just released additional guidance on the tax treatment of forgiveness of Paycheck Protection Program (PPP) loans authorized by the Coronavirus Aid, Relief and Economic Security (CARES) Act. But is it enough?

Nov 20th 2020
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The CARES Act says PPP loans may be forgiven without any tax consequences. The new ruling and accompanying revenue procedure (Rev. Rul. 2020-27; Rev. Proc. 2020-51) follow up on previous guidance stating that PPP loan expenses could not be deducted (Notice 2020-32).

“Today’s guidance provides taxpayers with greater clarity and flexibility,” said Treasury Secretary Steven T. Mnuchin in a press release.  “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”

But not everyone is completely on board. Some stakeholders in the tax community—including the influential American Institute of CPAs (AICPA)—are calling for more clarity. The AICPA is also one of over 80 organizations that have signed letters expressing concerns about the requirement that PPP borrowers with loans of $2 million or more complete a new form and provide extensive documentation supporting their request for relief funds.

Background: Based on the latest modifications to the CARES Act, PPP loans may be forgiven if proceeds are used over a 24-week period to cover payroll costs or other qualified expenses like employee benefits, mortgage interest and rent and utilities. o qualify for forgiveness, at least 60 percent of the proceeds must go to payroll expenses. Normally, loan forgiveness results in taxable income to the debtor.

Key point: The CARES Act creates a special exception for PPP loans. However, this tax treatment isn’t automatic; a business must file for forgiveness.

Because a business isn’t taxed on the proceeds of a forgiven PPP loan, prior guidance provided that loan expenses aren’t deductible. As a result, there’s no tax benefit nor is there any tax harm because the business hasn’t paid anything out of pocket. It’s a virtual wash for tax purposes.

The latest guidance concerns the timing of the loan forgiveness. If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan aren’t deductible whether or not the business has filed for forgiveness. Accordingly, you should encourage clients to file for forgiveness as soon as possible.

In the case where a PPP loan was expected to be forgiven but it is not, a new safe- harbor rule provides that the business will be able to deduct those expenses. 

Yet, the new guidance doesn’t go far enough to suit some tax experts. Notably, it doesn’t address the order in which expenses may be deducted and tax implications relating to other aspects like the qualified business income (QBI) for pass-through entities and sole proprietors.

Finally, some lawmakers continue to protest that it was the intent of Congress to allow deduction of expenses even when PPP loans are forgiven. The AICPA has consistently lobbied for deductions of expenses as well as requesting greater simplification in the processes and greater clarity on the tax treatment.

The upshot: We probably haven’t heard the last word on this subject. Keep an eye out for future developments.

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By SkinnVinny
Nov 23rd 2020 22:42

They should have just said forgiven loans are grants(income) and you may deduct the eligible expenses, a wash. What if, in fact, I want to do just that? For now I've been showing PPP Proceeds as an Other Income item on the P&L, and deducting wages and eligible expenses in full. I prefer to do this, so wages and payroll taxes reconcile to the payroll reports (W2s, 941s etc).

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