This information is current as of November 18th, 2020.
Update, November 18, 2020:
We have been closely monitoring legislative action and SBA guidance. Late Wednesday evening 11/18/2020, the Department of Treasury issued a press release that specifies their position is that if Paycheck Protection Program (PPP) forgiveness is reasonably expected then expenses paid with PPP funds are non-deductible for 2020 income tax purposes. This is regardless of whether a business’s PPP loan forgiveness application is submitted and/or approved in 2020 or 2021.
The American Institute of Certified Public Accountants (AICPA) is still lobbying for legislation to be passed that would allow all expenses paid for with PPP funds to still be income tax deductible and is cautiously hopeful that this remains possible. Please contact your congressperson and urge them to pass legislation allowing income tax deductibility for PPP expenses.
The rest of this article would only apply if the appropriate legislation is enacted or the Department of Treasury changes their interpretation.
Paycheck Protection Program (PPP) Forgiveness Planning
A lot of business owners are anxious to apply for PPP forgiveness. By doing so, they’ll have one less thing to worry about. However, rushing to apply for PPP forgiveness may not be the most prudent thing to do.
In order to understand why rushing for PPP forgiveness may not make sense, you need to understand how the taxation of the forgiveness of debt is typically handled. Usually, when debt is forgiven it is taxable income to the person or business who has the debt forgiven. However, when the Paycheck Protection Program was created Congress specifically stated that the forgiveness of PPP loan would not result in taxable income. The intent of Congress was that the PPP recipient would not have to worry about an income tax hit from PPP. However, the IRS had a different interpretation and has provided guidance that while the forgiveness of debt itself is not taxable, the expenses used for forgiveness of PPP would no longer be tax deductible. In essence, that makes the forgiveness of PPP loan taxable.
Congress has flirted with passing legislation to fix the IRS interpretation, but so far nothing has been passed. If Congress passes a fix, it is not clear if it would be retroactive or not. There is still a lot of uncertainty due to a lack of guidance, but it is possible that the loss of the deductibility of expenses used for PPP forgiveness would apply in the year the PPP loan was forgiven. This means that there are income tax planning opportunities as it pertains to PPP forgiveness.
What is income tax planning? Essentially it is working with your CPA firm and analyzing and making moves before the tax year is up in order to optimize your situation for income taxes. Income tax planning often involves deferring income and accelerating expenses (which in essence defers income taxes). In the case of PPP forgiveness and income tax planning, there are a couple of questions to consider:
1.Of 2020 and 2021, which is the better year to (potentially) take an income tax hit from PPP?
2. If the answer to the previous question is not 2021, what’s the risk vs. reward of losing PPP expense deductions in 2020 if possible 2021 legislation may allow expenses to be deductible for forgiveness received in 2021?
How a CPA Firm Can Help with PPP Forgiveness (and Planning)
There are a couple of ways that a CPA firm can help with PPP forgiveness and the associated income tax planning. First, a CPA firm can work with you to make sure your PPP forgiveness application and backup documents are complete and accurate, which will increase your chances of PPP loan forgiveness. Second, a CPA firm can help you with the issues surrounding income tax planning and PPP forgiveness.
Getting your PPP forgiveness application and supporting documents together is not a bad idea regardless of when you plan to submit it. You just need to think through (and plan) the timing of your submission and forgiveness. You need to also keep in mind that you must apply for PPP forgiveness within 10 months from the end of the covered period.
As always, the devil is in the details, so if you are considering applying for PPP forgiveness you need to consult with someone specific to your situation to ensure that you are making the best decision for yourself and your business.
Caroline Montgomery, CPA (NC License Number 39017), MSA, is tax manager and partner of Adam Shay CPA, PLLC. The most rewarding part of what she does is helping business owners and individuals achieve their goals, all while working with a dynamic team that is growing quickly. The firm focuses on a proactive approach by encouraging clients to minimize taxes via income tax planning and projections, or by focusing on other areas of their business as part of the firm's Virtual CFO services. The firm also offers tax preparation, fraud and forensic accounting and tax issue resolution services. She moved to Wilmington in 2014 and started at the firm in 2015. Caroline graduated with her her undergraduate and graduate degree in 2010 from East Carolina University. She is actively involved with NourishNC as their Treasurer and enjoys volunteering with various organizations throughout New Hanover County. In her free time, Caroline enjoys spending time with her husband, Mike, and dog, Mason, as well as travelling and going to the beach.
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