Charles R. Kennedy, CPA, MBA
Vice President & Director of Tax Services
Businesses and nonprofits that received Paycheck Protection Program (PPP) loans to help them stay in business through the Covid-19 pandemic should be looking ahead to applying for loan forgiveness over the next several months.
It also will be time to prepare for tax season and multiple questions about accounting and tax issues surrounding the PPP loans that have yet to be resolved by the IRS.
The fact that PPP loans, authorized by the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted last March, are forgivable creates questions about the accounting treatment of the funds on recipients’ books, as well as treatment under the Internal Revenue Code. Further complicating the questions is that some businesses and most nonprofits operate on a fiscal year basis, rather than calendar year. That means the loan proceeds may have been received in one fiscal year and will be forgiven in a different fiscal year.
The IRS has been slow to release guidance, so there are few answers at this point. Below is a sample of the questions that have arisen to date. We will keep you informed as guidance is released by the IRS.
Forgiveness granted in 2020 for a 2020 PPP loan
What happens to the expenses funded by the PPP loan?
Those expenses are nondeductible for 2020.
Forgiveness granted in 2021 for a 2020 PPP loan
For a cash basis taxpayer, when are expenses funded by the PPP loan recorded as nondeductible?
Likely those expenses are nondeductible for 2021. Depending on guidance from the IRS, you may have to amend your 2020 tax returns because the IRS may want you to record forgiveness in the year the expenses were incurred.
Waiting for guidance from IRS.
For an accrual basis taxpayer, when are expenses funded by the PPP loan recorded as nondeductible?
Not known at this time. According to GAAP rules, the loan is still debt unless the loan is forgiven before the year end. If the 2020 PPP loan is forgiven in 2021 the loan will still be recorded as debt. Yet it is still possible the forgiveness and the recording of expenses as nondeductible might occur in 2020.
Waiting for guidance from the IRS.
Tax issues
Is there any impact on my Research & Development Tax Credits since those credits are derived from wages?
Some taxpayers could lose R & D credits. In most cases, R & D credits are largely based on the wages paid to those conducting R & D activities. If the wages are not deductible (as they aren’t if they were paid with PPP loan proceeds), it is not known yet whether that will reduce R & D credits.
Waiting for guidance from the IRS.
What happens for fiscal year entities if the expenses forgiven are in two tax years?
It is not yet known how to deduct in the two years the expenses are considered nondeductible. The loan is forgiven all at one time yet the expenses are in two tax years.
Waiting for guidance from the IRS.
I have a flow-through entity (Partnership or S-corporation). Does this impact my Qualified Business Income deduction?
Regulations on how QBI wages are calculated appear not to be impacted if wages are nondeductible. Rev. Proc. 2019-11 allows for three methods of calculating QBI wages which related to using information on the W-2s and not wages per the tax return.
Waiting for guidance from the IRS.
Is there any additional guidance on the tax impact of PPP loan forgiveness?
None since Notice 2020-32 issued May 1, 2020.
What should I do about my 2020 estimated taxes?
If you believe your income will be roughly even with last year’s or higher, we recommend ‘safe harbor’ estimated tax payments based on your best income projections. If you believe your income will be lower, even with PPP loan forgiveness, contact us for guidance on estimated tax payments.
What is the impact for my state tax returns if my PPP loan is forgiven?
Massachusetts is following federal rules, as are many other states. If you file tax returns in several states, contact us for guidance on the specific states you do business in.
