Year-End 2020 Tax News & Planning Strategies
PPP Loan Forgiveness
Are expenses non-deductible in 2020 or in the year that you receive forgiveness?
by Ron Dean, CPA, Partner, Restivo Monacelli LLP
The Paycheck Protection Program (PPP) was the centerpiece of the CARES Act, providing businesses negatively impacted by COVID-19 with loans of up to $10M. For many businesses, the concern with filing for loan forgiveness is the "straddle-year" issue. Are the qualified expenditures used with PPP funds non-deductible in 2020 or in the year that they receive forgiveness?
In the most recent guidance issued by the IRS (Rev. Rul. 2020-27), borrowers who use the PPP funds for qualified expenditures in 2020 but whose PPP loan is not forgiven until 2021 cannot deduct these qualified expenditures in 2020 if there is a “reasonable expectation” that the loan will be forgiven. There is a safe harbor provision available for PPP borrowers to deduct qualified expenditures for those borrowers that have their loan forgiveness denied or who choose not to request loan forgiveness.
The bottom line is that the IRS is applying traditional tax accounting principals even during these unprecedented times. If income is tax exempt, you usually cannot also claim deductions relating to that income. Applying the rules consistently, businesses who secure the “free money” via a PPP forgivable loan cannot then deduct their expenses to the extent they're paid for with the loan. However, PPP has been embroiled in controversy since it was introduced, and Congress could still step in and reverse the IRS’s decision to deny tax deductions.
Restivo Monacelli will be following this matter closely and keep you informed of any rulings that will impact you and your business. In the meantime, if you have any questions, we encourage you to reach out to one of our tax specialists.