As prospects for an agreement on the next economic stimulus package grow increasingly uncertain in 2020 and the tax consequences for applying for PPP loan forgiveness remain unsettled, millions of small businesses and their advisors are struggling to determine when they should apply for forgiveness on the PPP loans they have taken. To date, 5.5 million small business owners received PPP funding. Of particular concern are the tax consequences that may await them if they apply for loan forgiveness by year-end.
The CARES Act made it clear that once a PPP loan is forgiven and becomes a grant, the funds are not income for tax purposes. The Internal Revenue Service (IRS) created concern when it issued Notice 2020-32 on April 30, 2020 clarifying that business expenses normally deductible for a business would not be deductible if PPP funds were used to pay for those expenses.
Prior to forgiveness, PPP is a loan and remains one until forgiveness is received. Even if borrowers apply for forgiveness today, most aren’t likely to receive a decision until 2021. The question many borrowers face is whether they should take the deductions now (on their 2020 tax returns) and amend those tax returns upon full or partial forgiveness; or not take the deductions and receive a refund if all or part of their PPP loan is not forgiven. To complicate things further, short of legislation or a change in IRS guidance, these businesses face potential penalties and interest if they take the deductions and then loan forgiveness is granted.
Should businesses file now for PPP loan forgiveness?
Some tax experts are advising their small business clients to forego the business expense deductions and file for forgiveness now, especially if at least 60 percent of the loan funds were used on payroll during the 24-week covered period (covered period begins on the day the loan was received), which would ensure forgiveness. If the current IRS guidance changes, an amended return claiming the deductions may be filed.
Other experts, including the American Institute of Certified Public Accountants (AICPA) leadership, advise waiting in the hope that final US Treasury and Small Business Association (SBA) FAQs on PPP forgiveness, and potentially legislation, will come before the end of the year clarifying the loan forgiveness and tax rules. The AICPA and many others have advocated for blanket forgiveness on loans under $150,000 with no avail to date. The approximately 4.2 million PPP loans of $150,000 or less account for 85 percent of all PPP approved loans.
On October 8, the SBA did provide a simpler forgiveness application for PPP loans of $50,000 or less. The borrower may ignore changes in employee headcounts as well as changes in salaries or wages, but is still required to make certifications and provide documentation for how the funds were spent.
This article was submitted by Wolters Kluwer Tax & Accounting, a provider of software and information services for tax, accounting and audit workers. Read another one of their submitted articles: Tax provisions to consider before embarking on a home improvement project.
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