Businesses Should Expect Paycheck Protection Program Forgiveness to Negatively Impact Tax Returns
Summary
This week the IRS issued IRS Revenue Ruling 2020-27 that clarified the tax treatment of forgiveness of Paycheck Protection Program Loans issued to businesses. In the ruling they reiterated their position that the forgiveness of the loan resulted in lowering the business’s allowable deductions. This effectively creates a taxable event. They also clarified that the tax implications were a 2020 taxable event if the business reasonably expected to receive forgiveness of the loan regardless of when the forgiveness application was submitted and the loan forgiveness was approved by the SBA.
Since the IRS has now addressed this issue in multiple communications, it does not appear that business owners will get any relief from the tax implications of the Paycheck Protection Program loan forgiveness without an act of Congress and/or the President. Unfortunately, that means tax planning should include the potential income taxes associated with the forgiveness. In other words, plan for the worst and hope for the best.
Background
As you may recall in our earlier communications, when the Paycheck Protection Program was passed by Congress, the bill indicated that the proceeds from the program would not be taxable income. However, the IRS later ruled that the related expenses were not deductible to the extent they were used as a basis for the forgiveness application. The theory was that if the business did not pay for the expenses, the IRS would not give them a tax deduction for those expenses. In a round about way this resulted in making the program taxable.
This week the IRS confirmed their original ruling and also ruled that the deductions was not allowed in 2020 if it the business reasonably expected the loan to be forgiven.
Ruling
Their exact wording in the ruling is as follows:
“A taxpayer that received a covered loan guaranteed under the Paycheck Protection Program and paid or incurred certain otherwise deductible expenses may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”