As tax planners, we are familiar with the uncertain world of predicting future events and their related tax consequences. In working with businesses who obtained PPP loans, namely for those who have, or intend to have, some or all of these loans forgiven, however, the topic of 2020 deductions brings about uncertainty. With the current IRS stance held in unpopular opinion and the rapid-fire release of program guidance by the SBA and Treasury, borrowers and their advisors are facing some tough calls as they navigate tax planning for 2020.
What does the IRS say?
The IRS published guidance earlier this year, via IRS Notice 2020-32, which expressed the position that, since the forgiven PPP loan was nontaxable income, no related expenses were deductible. Since that time, there has been a substantial “hue and cry” from the legal, business, and tax communities to allow these deductions to stand. The general consensus is there will be a fix by the end of 2020, either regulatory or by statute, to ensure expenses associated with the PPP forgiven loans are deductible.
However, this hope for a fix does not alleviate the burden on businesses as to what they should do for paying current estimated tax payments related to their 2020 tax liability. There is also the question of deductibility for fiscal year businesses looking to file tax returns before the end of 2020. Penalties may apply to underpayment of 2020 estimated taxes or underpayment of tax due with 2020 fiscal year tax returns. What are these businesses to do, in terms of deducting or not deducting expenses related to PPP forgiven loans?
The confusion is further magnified by the timing of the PPP loan forgiveness and related expenses. Often, the 24-week period to expend the funds does not expire until the end of 2020. Many businesses will not apply for, or receive, forgiveness on their 2020 PPP loan until next year; however, the expenses have all been incurred during calendar year 2020. Additionally, with guidance from the SBA and Treasury continuously being issued, many businesses and their advisors are opting to wait until all guidance on PPP loan forgiveness has been released.
So, what are the options?
Borrowers might deduct all PPP loan forgiven-related expenses, none of them, or some portion of those expenses. The Treasury and the IRS have been silent since the issuance of their Notice earlier this year. Logically, it would seem, for those businesses seeking or obtaining loan forgiveness after 2020, that deducting all related expenses for 2020 may be relatively “safe.” The IRS is unlikely to penalize a business for taking those deductions when forgiveness has yet to occur. After all, until the act of loan forgiveness is sought and undertaken, knowing how much, if any, will be forgiven is unknown (as of the end of 2020). This may be yet another strong argument for delaying the application for forgiveness until after the end of 2020.
For businesses that have received loan forgiveness, the correct path is less clear. While most in the tax community believe guidance that is favorable to deducting PPP loan forgiven-related expenses for 2020 is the likely, if not inevitable, outcome, there is some risk. Should no favorable guidance prevail, deducting these expenses may produce some underpayment penalties. For these businesses, their choice is a bit like a “roll of the dice.” Since the downside is simply some interest (underpayment penalties) due, however, it may well be worth opting to deduct all PPP loan forgiven-related expenses for 2020, pending the hoped-for favorable guidance.
Perhaps tax planning for the uncertainty of deducting PPP loan forgiven-related expenses this year is a symbolic metaphor for the year of uncertainty that is 2020!
Let’s make a plan.
Our PPP Services Group members have been hand-picked, based on knowledge, training, and experience, to deliver advice and sound recommendations throughout the entirety of your loan forgiveness process. Our goal is to help businesses submit their loan forgiveness application with confidence, knowing their preparation and follow-through were backed by a solid team of professionals. Contact us today to get started. And visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by Tom Flood, CPA