Nov 18

Nov 18 BREAKING NEWS: Timing & Taxability of PPP Loans

BUSINESS OWNERS, CFO SERVICES, CREATIVE CLIENTS

Disclaimer: Ultimately it is 100% up to your lender on forgiveness and most are being transparent in that we don’t have enough guidance on how exactly its going to work. I am not a lender and this blog does not serve as support in your ability for forgiveness. In addition, this blog is not to be used as tax advice or to support any financial decisions. Consult your tax professional.

Is it taxable?

Yes. Unfortunately. There is more info here on that.

The CARES Act states its not taxable income, while the IRS says you can’t take the deductions you used the loan for - thus making it taxable in the end.

So is it taxable in 2020 or 2021?

There has been confusion on WHEN the PPP loan is to be forgiven. If by now (November 2020) its not forgiven, its highly unlikely it’ll be deemed forgiven by the end of the year.

There were questions on whether that means its taxable in 2020 or in 2021 (the year its forgiven).

Per revenue ruling 2020-27, the taxpayer will not deduct expenses in 2020 if the taxpayer reasonably expects to receive forgiveness. Based on prior IRS cases, the forgiveness of these expenses are foreseeable and therefore should be treated appropriately.

In other words, if you have a PPP loan that qualifies for forgiveness and you plan to apply for forgiveness - you CANNOT deduct those expenses in 2020.

Under safe harbor from Rev. Proc. 2020-51 as long as the following are true, you cannot deduct expenses in 2020:

You have applied for forgiveness by the end of 2020
You intend to apply for forgiveness in 2021

The IRS has issued a safe harbor for this exact situation as well as the following other situations:

What if you apply for the loan and are denied in 2021?

So, at this point you’ve filed 2020 assuming you’d get forgiven - but then aren’t.

If you meet the requirements of safe harbor (applied for forgiveness or intended to apply) then there are two outcomes:

Correct the 2020 return (if timely filed) by amending or AAR under section 6227 of the Code
Claim the deductions in a subsequent year

And if we were planning on applying and then decided not to?

Same options as above - either amend 2020 or report in the subsequent year.

Okay, so should we apply for forgiveness now?

You can if its available. I do have opinions to share:

There is a good chance they will still simplify the forms down the road
In addition, people are still fighting for easy forgiveness for loans under $150k
Many banks are not ready for applications yet
You do have 10 months to apply and now we know what this means for taxes either way
There is still a tiny chance that the EIDL grant could be forgiven

So having all that said, I don’t see an urgency to apply ASAP - especially because they are STILL figuring everything out right now. However, you do you - and you should consult your advisors.