‘These uncertain times’ has been a phrase often used in recent months, and in no facet of 2020 life is it more applicable than Paycheck Protection Program (P3) program loans implemented in within the framework of the CARES law. In just a few months, the Small Business Administration and the Internal Revenue Service oversaw the issuance of over 5 million PPP loans totaling over $ 500 billion, while revising, updating and fundamentally changing the rules governing the program.
Most borrowers have now received and spent their loan proceeds within their applicable 8 or 24 week coverage period, and are now turning to the next phase of the program: asking the SBA for a loan forgiveness. It is not surprising that there are still facets of the forgiveness process that remain unresolved. One of these areas of uncertainty is the tax treatment of expenses paid with PPP loan funds.
The CARES Act explicitly states that any PPP loan fund that is canceled will not trigger debt cancellation income. However, it was not clear from the text of the legislation whether borrowers would be allowed to deduct payroll, rent, and other business expenses paid with their loan funds. The IRS apparently answered this question definitively in Notice 2020-32, stating that borrowers were not allowed to deduct otherwise deductible expenses if paying the expense results in the cancellation of a PPP loan, concluding that allowing such a deduction would result in a double tax benefit. The backlash from the IRS ‘position was swift and far-reaching. The American Institute of Certified Public Accountants (AICPA) and more than 170 other business and trade organizations have voiced opposition to the IRS’s position, asking Congressional leaders to amend the CARES Act to allow deduction of expenses funded by PPP. Despite support from both sides of the aisle, Congress has yet to make this change.
Assuming the IRS’s position remains intact, the question then becomes how PPP borrowers should report the expenses on their 2020 tax returns if they have not yet obtained forgiveness on their loans. It seems clear from the IRS opinion that expenses are deductible unless they are directly related to the forgiven loan funds. If so, should a borrower who has not yet claimed the rebate when filing their 2020 tax return deduct PPP expenses on their 2020 tax return? If this is the case, and if the remission is subsequently granted by the SBA, will the borrower be required to modify their 2020 declaration, or will the Treasury implement an expenditure declaration procedure during the from a later year? Is it possible that Congress will pull itself together by tax filing season to rescind the IRS notice? At this point, there are no concrete answers to these questions.
For borrowers and their advisors struggling with these questions, there is one definitive way to answer them: ask for a rebate ASAP. While there is no deadline for requesting a remission in the CARES Act or in the SBA guidelines, the de facto deadline is 10 months from the end of the applicable coverage period of 8 or 24 Borrower Weeks, as this is the date borrowers will need to start repaying their PPP loans if they haven’t gotten the forgiveness by then. However, in order to avoid having to deal with the uncertainty of how to report PPP expenses, and possibly modify income statements, borrowers should strive to submit their rebate requests as soon as possible. If by the time a borrower files their 2020 tax return, they know the amount of their loan that has been canceled, then they can confidently report the deductibility, if any, of expenses paid with PPP funds. And “in these uncertain times” it’s a good idea to seek as much certainty as possible, at least until the rules change again.