Income Tax Effects of PPP Forgiveness Still Uncertain

When Congress enacted the CARES Act (the Act) that created the Paycheck Protection Program (PPP), it provided a means for small businesses to maintain their work forces and keep people employed. The intention was monies received would potentially be forgiven and not result in taxable income. The Internal Revenue Service however ruled that expenses for the items funded by forgiven loans are not deductible

Jennifer Verly June 30, 2020

If you received a PPP loan as a result of the Coronavirus Pandemic, you may be aware that the PPP process is ever evolving.

With Individual taxes due for 2019 by July 15th and first and second quarter 2020 federal estimated taxes also due July 15th there are a lot of questions on how PPP will affect your company’s taxable income for 2020 tax planning.

When Congress enacted the CARES Act (the Act) that created the Paycheck Protection Program (PPP), it provided a means for small businesses to maintain their work forces and keep people employed. The intention was monies received would potentially be forgiven and not result in taxable income. The Internal Revenue Service however ruled that expenses for the items funded by forgiven loans are not deductible.

For example: Assume you received a PPP loan of $250,000. You then proceed to spend these funds properly under the PPP guidelines and therefore have $250,000 of expenses incurred during your covered period. From the IRS’s perspective, you don’t have 250k of additional income from the loan proceeds, but you also don’t have 250k of expenses, essentially netting to a net zero tax affect.

Depending on how you recorded your PPP loan proceeds, you may have recorded the loan on the balance sheet and then when the funds were spent recorded the incurred expenses on your profit & loss (P&L) statement. Based on the IRS position your expenses would then be overstated for 2020 by the $250,000. If you recorded the PPP loan proceeds as other income on your P&L and also recorded the expenses on your P&L, your net income would properly reflect the IRS’s position.

Soon after the release of the Notice of the IRS position, bipartisan Senators and Representatives indicated that the IRS position was not the intent of the CARES Act legislation. As a result, in the Senate, on May 5, 2020, Senator Cornyn, along with four other Senators from both parties authored S. 3612, as a means to override the IRS position. S. 3612 specifically indicates no expense related to forgiveness is reduced. That bill is currently in the Senate Finance Committee. On May 12, 2020 a companion bill H. R. 6821 was introduced in the House of Representatives, similarly overriding the IRS position, and was referred to the House Ways and Means Committee.

Adding to this uncertainty is the state of Minnesota and others states’ conclusion on the deductibility of expenses funded by PPP forgiven loans. Needless to say, we are not optimistic of a favorable position from the state of Minnesota.

Where does this leave you for 2020 planning? Until Congress acts to clarify its intent, the income tax effects of PPP forgiveness is uncertain. While we do not advocate increasing estimate payments of 2020 taxes at this time, we wanted you to be aware that 2020 taxes could be higher in relation to PPP monies you have received.

As always, we will continue to keep you updated as the PPP evolves and how it may affect you.