Congressional meetings around additional stimulus for small businesses may have come to a halt until after the election. Prior to talks stalling, there seemed to be a bi-partisan agreement about automatic forgiveness of PPP loans < $150,000, but this never became law.
In the last few days, several of our clients have received calls from their bankers asking them to begin the loan forgiveness documentation process. If you have a PPP loan > $150,000 and would like to apply for forgiveness, we recommend that you talk to your lender to find out when its PPP loan forgiveness application portal will be ready.
Expenses paid with PPP funds are not tax-deductible.
Section 1106(i) of the CARES Act states that the amount of loan forgiveness under a PPP loan is excluded from gross income.
To avoid creating an unintended double benefit, PPP funds used for business expenses that led to loan forgiveness are not deductible under IRS Notice 2020-32.
This means you will not claim income for PPP loans forgiven, nor will you be allowed to deduct expenses paid with PPP funds, so when you apply for forgiveness, you should track the expenses forgiven as they will not be tax deductible.
Is deferred taxation of loan forgiveness an option?
IRS Notice 2020-32 has caused some PPP borrowers to wonder if they can choose whether they disallow the deductibility of expenses in 2020 or 2021.
There is no guidance on this issue from the IRS or the SBA, but it’s not recommended to take a deduction for expenses that you expect to be forgiven because eligibility for PPP forgiveness is based on “the sum of” the covered expenses paid and incurred during the covered period, according to section 1106(b) of the CARES Act.
Could deductibility of PPP expenses change?
Denying tax deductions for PPP loan recipients was not the original intent of the program. However, to help small businesses avoid an unexpected tax bill after such a difficult year, several members of Congress are pursuing legislation that would allow for all PPP-related expenses to be deductible. We recommend that taxpayers proceed as if no change is coming (and potentially amend their returns if this windfall occurs).
Obviously, this is a highly volatile situation and the House, Senate and President could reach a deal, so we will pay close attention.
Ed Jameson, CPA, Managing Member
I’ve been in practice for over 40 years helping our small business clients procure, manage, and survive audits on more than $6 billion in federal government contract and grant funding. We’ve been featured presenters and panel moderators at Tech Connect’s National SBIR/STTR conferences since 2011, and I’ve presented at the DOD’s Mentor Protégé Summit and present regularly for several state and local organizations.