Business owners who expect a PPP loan forgiveness can’t deduct expenses

The headquarters of the Internal Revenue Service (IRS) in Washington, DC

Janhvi Bhojwani | CNBC

Entrepreneurs who took out a forgivable loan this year cannot deduct certain expenses from their taxes if they expect the debt to be forgiven, according to the IRS and Treasury Department.

The two agencies on Wednesday released guidelines on the Paycheck Protection Program – an emergency funding line for small businesses established by the CARES Act.

Typically, applicants are eligible for loan forgiveness if they use at least 60% of the proceeds on salary costs. Businesses that fail may be eligible for a partial rebate.

Although the program has generated a lot of interest – over 5 million loans have been approved, representing 525 billion dollars – questions remain as to whether small businesses would be allowed to claim deductions for costs covered by PPP financing.

The action of the IRS and the Treasury seems to solve the problem.

Businesses that “reasonably believe” that their loan will be canceled in the future cannot deduct these costs – whether or not they have filed a cancellation request, agencies said.

The finding has frustrated tax experts, who fear borrowers’ incomes will appear higher on paper if they cannot deduct the expenses. In turn, their 2020 taxes will also be higher at a time when cash is tight.

“These companies got their PPP loan, spent the money and have nothing left, and they are effectively either bankrupt or running a lot less business than they were nine months ago,” said Adam Markowitz, registered agent. and Howard’s vice president. L Markowitz PA CPA in Leesburg, Florida.

“Now they get a tax bill like they were making money from the start,” he said.

Tax Free Rebate

Senator Chuck Grassley (R-IA) speaks during the third day of the confirmation hearing of Supreme Court-appointed Justice Amy Coney Barrett before the Senate Judiciary Committee on Capitol Hill in Washington, DC, United States, October 14, 2020.

Erin Schaff | Reuters

Earlier this year, the IRS said that although the forgiveness of the loan would be tax free, borrowers could not deduct their expenses.

Allowing both the rebate and tax-free deductibility would be a double benefit, the agency concluded.

Lawmakers on both sides of the aisle disagreed with this and proposed legislation that would allow write-offs.

The Small Business Expense Protection Act 2020 is supported by Sens. Chuck Grassley, R-Iowa; John Thune, RS.D., and Ron Wyden, D-Oregon.

Learn more about smart tax planning:
Start a parallel business? Get a handle on these tax tips first

This is the most you can save in your 401 (k) plan in 2021
IRS accepts this workaround to dodge the $ 10,000 SALT cap

Representative Richard Neal, D-Mass., Who is also Chairman of the House Ways & Means Committee also supports deductibility of canceled expenses.

This suggests that Congress could address the issue again in another Covid-19 relief bill. When that will happen is still uncertain, as lawmakers have spent most of the year fighting for the next round of aid.

“Thune and Neal disagree on a lot of things, but the fact that they agree on this point is a good indicator that it will pass,” said Ed Zollars, CPA and partner at Thomas, Zollars & Lynch in Phoenix and an instructor at Kaplan Financial Education.

No forgiveness? You can deduct

Although the tax authorities do not allow applicants to benefit from both a tax rebate and a tax deduction, the IRS also said Wednesday that entrepreneurs whose PPP loans are not canceled may be able to deduct their expenses.

“If it turns out that your expectations were too optimistic, there is a special rule that allows you to recover in this scenario,” Zollars said.

In this case, the declarants can take the write-offs on their declarations for 2020 or 2021.

Amounts that are not remitted must be refunded. PPP loans have an interest rate of 1%. Generally, loans issued before June 5e maturity in two years, while those issued after that date expire in five years.

Waiting can make sense

Even with this advice from the IRS, there is still a possibility that Congress could propose legislation to allow deductibility of waived expenses.

Entrepreneurs who have taken out PPP loans should prepare to extend their tax return for 2020 next spring, Zollars said.

“Potentially, we get the deduction if Congress passes this,” he said. “There is a reasonable chance that we will get relief, but there is no guarantee.”

Previous PPP loan necessity certifications and fraud investigations
Next Student loan cancellation during coronavirus: everything you need to know