The covered period for many Paycheck Protection Program (PPP) loans has come to an end and businesses are now looking for guidance about applying for forgiveness. And with tax season quickly approaching, there are many new questions about how forgiven loans will be treated for tax purposes. Typically, if a personal or business loan is forgiven, the amount is considered income to the borrower. However, according to the CARES Act, the forgiveness of the PPP loan is not taxable.
The IRS has always asserted the expenses related to loan forgiveness (including payroll costs, mortgage interest, utilities, and rent expense) were not deductible, which was released in Revenue Ruling 2020-32. Since the loans were excluded from income, being able to deduct expenses meant business owners got both the benefit of the program proceeds and deduction of expenses on top of it. This is viewed as double-dipping by the IRS.
After much debate and backlash, the IRS issued a new Revenue Ruling 2020-27 and Revenue Procedure 2020-51 which offered more guidance. In them, the IRS doubled down that expenses still cannot be deducted if a business owner “reasonably expects” their loan to be either fully or partially forgiven. This applies to taxpayers even if they will not apply for forgiveness until 2021. Regardless of the timing of actual forgiveness, if the amount should be fully forgiven then the expenses related to their loan cannot be deducted in 2020.
If the business owner does not deduct expenses because the PPP loan is expected to be fully forgiven, but later it gets partially or fully denied, then the expenses can be deducted on a timely filed 2020 tax return, a 2020 amended return, or a timely filed return in 2021. This also applies if a business owner decides to forgo applying for forgiveness altogether (and instead decides to fully repay the loan, but already added back the expenses on 2020 tax return).
Despite the additional information provided by the IRS and Treasury, there are still many uncertainties surrounding the PPP loan forgiveness process. If you want more information or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.