PAYCHECK PROTECTION PROGRAM (PPP) TAXABILITY GUIDANCE UPDATE
Tax planning is imperative as year-end approaches. For businesses with fiscal year-ends or PPP loans greater than $2 million, contact your tax advisor to discuss how PPP and tax-deductible may impact your filing.The Internal Revenue Service (IRS) issued further guidance regarding the deductibility of expenses for taxpayers that received a Paycheck Protection Program (PPP) loan administered through the Small Business Administration (SBA).
This summer, the IRS issued guidance (Notice 2020-32) that taxpayers are not permitted to deduct expenses otherwise deductible if the payment for those expenses results in PPP loan forgiveness. Most recent guidance clarifies the timing of these non-deductible expenses.
Rev. Rul. 2020-27 addresses the tax timing impact of PPP loan forgiveness. If a taxpayer has a reasonable expectation of loan forgiveness at the end of 2020, related expenses are not deductible in 2020, regardless of when the loan forgiveness application is submitted or approved by the SBA. Thus, a business or individual with a December 31 year-end will have an increase in taxable income by the amount of expected PPP loan forgiveness.
Rev. Proc. 2020-51 provides a safe harbor allowing a taxpayer to deduct expenses in the 2020 tax year only if the taxpayer is either (1) denied forgiveness by the SBA in the 2021 tax year or (2) irrevocably withdraws its application in the 2021 tax year. These two scenarios are unlikely.
As a result of this guidance, tax planning is imperative as year-end approaches. For businesses with fiscal year-ends or PPP loans greater than $2 million, contact your tax advisor.
Please note the IRS position diverts from original Congressional intent; thus, this issue may be addressed in future COVID relief legislation as both the House and Senate have bills authored to allow deductions.
(Source: LUTZ Paycheck Protection Program (PPP) Taxability Guidance Update)