PPP Forgiveness and Expenses Eligibility for Your 2020 Tax Return

On November 18, 2020, the IRS and the Treasury issue new guidance relating to the tax treatment of PPP ‘Qualifying’ expenses for this years’ tax return.

I’m going to caveat this right now, I am just sharing this update based on what we know today – as with everything PPP, it can all change but for now and especially for those of you looking at forecasting your accounts through to the end of this year, this is something that you should discuss with your CPA.
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In summary, the IRS and the Treasury have stated the following:

• Whilst the PPP Forgiveness is tax-free, business owners cannot deduct the expenses that were covered by the loan in their 2020 tax return
• If a business has not submitted their forgiveness application to their Lender but plans to do so in 2021 if they “reasonably believe” the loan will be forgiven then, again, the expenses covered will need to be excluded in the 2020 tax return
  • Side note, if some expenses are later deemed to not be forgiven then you will be able to file an adjusted return (assuming that you file your returns timely filed, including extensions) or in your 2021 tax return
• If a business is likely to only receive a partial forgiveness then the expenses that are not forgiven will be deductible
• If a business elects to not apply forgiveness and convert the PPP to a loan repayable then these expenses can be claimed in the 2020 tax return as all you did was to tax a loan to help you through
  • PPP loans carry a 1% interest rate with loans issued before June 5 maturing in 2 years and those issued after that in 5 years – but, if you are considering that option, please confirm that with your lender

This latest guidance provides clarification that the PPP loan forgiven will be tax neutral for federal tax purposes – the forgiveness is not taxable but, by the same token, the expenses aren’t deductible as there was no ‘out of pocket’ expense.

Just to throw a spanner in the works here, this is solely FEDERAL guidance as each State has its own determination. California, currently, considers the forgiven debt as taxable income so the expenses will be deductible so, as with the IRS review, there’s a tax neutral result but they will also issue new guidance as they complete its ‘ analysis of the CARES Act.

As mentioned earlier, this is a summary of our reading of the guidance issued last week and we strongly recommend reaching out to your CPA for advice on the best course of action for your business.