After nearly eight months, significant uncertainty about the Paycheck Protection Program Loans remains.
The Bad News
On November 18, Treasury and the Internal Revenue Service released Revenue Ruling 2020-27 and Revenue Procedure 2020-51. Both of these confirm their earlier position expressed in Notice 2020-32 that expenses paid with funds from a PPP loan which is later forgiven are not deductible. It is also their position that this occurs at the time the expenses are paid and not at the time the loan is forgiven.
Many academics, commentators, and most importantly, members of the House and Senate disagree.
In addition, Treasury and the SBA seem to want to revisit the issue of loan necessity and the availability of credit elsewhere standards. These new hurdles come months after the loans were obtained, rely on hindsight, and are in apparent contradiction to Congressional intent.
The Good News
There is something you can do about this uncertainty. On Monday, the AICPA released an update of the PPP loans. That update and their call to action is reproduced below.
November 23, 2020 – Volume 27 No. 57
Many small businesses may be hit with a surprise tax bill related to Paycheck Protection Program (PPP) loans unless Congress acts soon.
In the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress clearly intended for recipients of forgiven PPP loans to be able to deduct otherwise-deductible expenses associated with those loans for tax purposes.
But the IRS has contradicted congressional intent. It has declared that borrowers who expect their PPP loan to be forgiven cannot deduct those expenses on their federal tax returns.
The AICPA has already expressed its opposition and engaged with Congress and Treasury to work to ensure that PPP expenses are deductible.
Now we need your help.
Tell your members of Congress to support small businesses by quickly passing S. 3612 and H.R. 6821, the Small Business Expense Protection Acts of 2020, or H.R.6754, the Protecting the Paycheck Protection Program Act.
This legislation will ensure that the receipt and forgiveness of coronavirus assistance through the PPP does not result in an unexpected and burdensome tax cost for organizations that complied with the terms of the PPP. Passing this legislation as soon as possible will allow small businesses more certainty as they focus on year-end business planning that is especially important in these challenging economic times.
To save time, you can copy and paste the draft email below. Find your U.S. senators’ and representatives’ contact information at Congress.gov.
I am writing you today to strongly encourage you to include in any year-end, must-pass legislation language that will allow millions of small business owners a tax deduction for expenses paid with Paycheck Protection Program (PPP) forgiven loans.
Bills have been introduced in the Senate (S.3612 sponsored by Senator Cornyn (R-TX)) and in the House (H.R. 6821 sponsored by Representative Holding (R-NC) or H.R. 6754 sponsored by Representative Fletcher (D-TX)) that would ensure that PPP loan recipients are provided the full benefits intended in the CARES Act.
All Americans have been impacted by the COVID-19 pandemic, and your actions in Congress have provided much-needed assistance to millions of struggling businesses.
It is important that you ensure that these same businesses are not also subject to additional and unexpected taxes as they continue to struggle to survive.
Borrowers who are eligible for forgiveness of their PPP loans have spent the funds as the program directed. Unless they are allowed to deduct these expenses, they may be forced to spend additional funds to pay taxes on the loan proceeds – funds they may not have. Passing this legislation as quickly as possible will provide small business owners more certainty as they focus on year-end business planning that is especially important in these challenging economic times.
I ask that you contact your Senate and House leaders to ensure that PPP loan forgiveness deductibility language is passed by Congress before the end of the year.
Thank you for adding your voice to this effort. By banding together, we can better help small businesses that cannot afford an unexpected tax bill on their PPP loan expenses next year.
Please feel free to personalize the draft email above for your own business situation.
Sorry, No Surprises Today.
Even in light of this uncertainty, many banks are encouraging their borrowers to apply for forgiveness as soon as possible. While it might be in the banks’ best interest to get these 1% loans off of their books, they may not realize that it is rarely in the best interest of a PPP borrower to apply early for forgiveness.
Except in extraordinary circumstances involving sales of assets, changes in ownership, or dramatic changes in headcount or hours worked, it remains LSL’s position that borrowers should wait to file their forgiveness applications. It is also our position that, in general, the filing of your 2020 income tax returns should be extended as we wait for clarity on these issues.
As always, if you have questions about your specific situation, please don’t hesitate to contact your LSL partner or team member.
We will keep you posted if we receive any additional significant guidance from Treasury and the SBA.
Dave focuses on tax compliance and planning in the areas of income and estate tax. He is the tax partner for our automotive group but he’s also tapped for his expertise in real estate, manufacturing and professional services. He’s a whiz at estate and gift taxation and can create a customized approach to designing and implementing a successful exit plan for business owners.
You can reach Dave at 714-672-0022.
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