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To Forgive or Not to Forgive (in 2020): That is the PPP Question

By Anthony P. Daddino on September 16, 2020
For the many businesses that secured a potentially forgivable loan under the Paycheck Protection Program (PPP), one of the more pressing issues is whether to apply for forgiveness now or later and the tax implications of forgiveness in 2021 with respect to 2020 expenses that may become non-deductible upon forgiveness. So what is the right answer?

Let the lawyer-hate begin, because the answer is: it depends.

The IRS has made it clear in written guidance that otherwise deductible business expenses, such as rent and wages, paid with PPP borrowings are not deductible for federal income tax purposes. The IRS has justified its position by analogizing the situation to interest on loans used to purchase or maintain securities generating tax-exempt income, which is not deductible under Code Section 265. Several members of Congress have chastised the IRS for this seemingly harsh position, but to-date the IRS has been unwavering and efforts to pass legislation to override the IRS have stalled.

Under the latest iteration of the PPP, businesses have 24 weeks to spend the funds on eligible expenses and 10 months from the end of that period to submit an application for loan forgiveness. There is then a semi-indeterminate time period, lasting at least a few months, during which the lending bank and SBA make a forgiveness determination. In the absence of formal guidance, a litany of questions arise including:

  • When do the expenses paid with PPP funds become non-deductible? (Although most believe this occurs at the time of formal forgiveness, the IRS has been less than clear.)
  • How does a business treat 2020 expenses that become non-deductible sometime in 2021?
  • Does the business report the forgiven 2020 expenses as income in 2021 or reduce current year expenses?
  • Is the business required to amend its 2020 tax return to self-disallow any business expenses that later become non-deductible?
  • Will interest be due on the additional taxes due as a result of amending the 2020 return? (Presumably so.)
  • What about quarterly estimated tax payments? Should a business assume that the PPP expenses will be forgiven and therefore not be deductible in calculating such payments?
  • Will the IRS penalize taxpayers for failure to fully deposit taxes due where the businesses treat the not-yet-forgiven PPP expenses as deductible?
In light of this uncertainty, many businesses have chosen to wait for guidance from the IRS and/or SBA on these matters. But to-date guidance has been slow to come. While the conservative approach is to avoid deducting the 2020 expenses, this approach creates complications for businesses that engaged in acquisitions or dispositions as well as businesses where an owner retired during 2020. And at a time when cash is king, businesses are resistant to the idea of potentially overpaying their taxes, especially if there is any level of uncertainty regarding the amount of the PPP loan that will be ultimately forgiven.

At the end of the day, the answer depends on the client, his or her business, the business needs, and the client’s risk tolerance. As tax professionals, it is incumbent upon us to advise clients of the pros and cons of the various options and tax treatments and hope that the IRS extends grace to both taxpayers and tax professionals alike in doing a little guesswork.

If you have any questions about the Paycheck Protection Program or any other tax-related matter, please do not hesitate to contact me at (214)749-2464 or adaddino@meadowscollier.com.