As we have found with much of the PPP loan program, following the current guidance is like being in a maze. Sometimes we feel like Reagan (Linda Blair) in The Exorcist — the more we read, the more our heads spin around!
No matter how confusing, though, it’s essential to keep up with the ever-changing guidance. And of equal importance, if you received a PPP loan due to the COVID-19 crisis, you should be aware of the related tax issues. Although the IRS has clarified some taxation rules over the past several months, the taxation of PPP loans and the amounts forgiven have not changed. Here’s a quick overview to help you plan.
PPP Loan Forgiveness and Tax Implications: Here’s What You Should Know
As we approach the end of the year, we are faced with how to treat the deductions associated with the PPP loans. The IRS previously determined that if a business's PPP loan is forgiven, they cannot deduct any business expenses paid for by the loan. New guidance issued this week reiterates this position and provides a safe harbor for taxpayers whose loans are not forgiven.
The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses. The rulings:
(1) deny a deduction if the taxpayer has not yet applied for PPP loan forgiveness but expects the loan to be forgiven; and
(2) provide a safe harbor for deducting expenses if PPP loan forgiveness is denied or the taxpayer decides to not apply for forgiveness.
Should You Scramble to File for PPP Loan Forgiveness in 2020?
So, should you hurry up and file for PPP loan forgiveness now? Based on current IRS guidance, as mentioned above, it does not matter whether you rush to apply for forgiveness in 2020 or wait until the new year. If you expect your PPP loan to be forgiven, deductions are not allowed in 2020, regardless.
We encourage you to be proactive by downloading and reviewing the forgiveness application and gathering the necessary information (including required attachments) to have everything on hand and ready to go once your bank clears you to apply.
As Always, There Are Still Some Lingering Questions
As has been the case with the entire PPP loan program, the tax community is waiting for clarification and continued guidance. Congress's intent and the Treasury Department's interpretation still don't align, and we will continue to follow this topic and keep you in the loop.
As a brief recap, under the current IRS guidance, you are essentially paying tax on your PPP loan in 2020 no matter what. Please note that if we are preparing year-end projections for you, we will take that approach and monitor the situation closely for further guidance from the IRS.
We wish you and your family a healthy and enjoyable Thanksgiving holiday. And, despite all this COVID-19 mess, MGA will continue working hard to make the complex simple for you.