Richard A. Huffman, CPA, MST, Tax Partner
Tony Maldonado, CPA, Tax Senior
While the current law states forgiven Paycheck Protection Program (PPP) loans are tax-free, the Internal Revenue Service previously issued guidance stating that the qualifying expenses paid with the forgiven loan funds are nondeductible for income tax purposes. There has been uncertainty as to whether the qualifying expenses would be non-tax deductible when paid in 2020 or when the loan is forgiven which could go into 2021.
The IRS just recently released awaited guidance stating if your business received a PPP loan and there is a reasonable expectation you will qualify for loan forgiveness, the qualifying expenses will be non-tax deductible when paid in 2020.
Additional guidance also addressed that if your loan forgiveness is denied, in whole or in part, or your business never requests forgiveness, your business can expense the qualified expenses either when paid, when the forgiveness is denied, or at the time the company decides not to apply for forgiveness. Therefore, you may have the ability to decide to deduct the expenses in 2020 or 2021.
With the non-tax deductibility of qualifying expenses in 2020, businesses may incur unexpected income tax consequences which needs to be properly planned for before the end of this year.
For example, if your business obtained a $1M PPP loan and operational income will breakeven for the 2020 tax year without the loan, the non-tax deductibility of the expenses paid with the loan will create $1M of taxable income in 2020. The resulting taxable income either needs to be properly planned for to minimize or sufficient funds should be set aside to pay the tax liability.
Our tax specialists at Wright Ford Young & Co. are well versed in PPP loans as well as year-end tax planning strategies. Please contact a WFY tax specialist or contact us here to discuss further.