As it stands right now, PPP loan proceeds (and the related forgiven amount) are expressly excluded from income. However, the proceeds are technically taxable because the IRS has published guidance that disallows expenses paid with forgiven PPP proceeds. This seems to be against Congress’s intent for the program, and many members of Congress are upset about it. There have been a couple of bills introduced that would allow the deductibility of PPP expenses, but with all happening in Congress right now, the effort to recognize those costs as expenses has stalled.
The crux of the issue is the forgiveness piece of it. Because of that, I am advising all clients who took PPP loans to delay applying for forgiveness until later in the year, or in 2021 (depending on when the alternate 24-week qualification period ends for you). There are a couple of reasons for this:
- I still believe, and most industry guidance agrees, that we will get rubber stamped forgiveness on PPP loans under some nominal amount (probably $150k) sometime in the future. A number of professional organizations in the tax industry are lobbying for this. In addition, the bank industry is put off by the amount of work involved in vetting the forgiveness process, so they are involved in lobbying for this also. I expect to see this change happen at some point, but it may not be soon given all that is going on in Congress right now.
- There is still the issue of expenses paid with PPP funds being nondeductible for tax purposes. This is directly contradictory to Congress’s intent with the PPP loan program, but nevertheless that is how the IRS has determined the rules should be. I’m not sure if this will get fixed by Congress (it’s about 50/50 right now), but in order to run the clock out, I am suggesting that all clients who received PPP funds apply for forgiveness as late as possible. Depending on when you received your PPP funds, using the alternate 24-week compliance period will push most entities into 2021 before the clock on forgiveness runs out. This accomplishes two things:
- It allows more time for Congress to pass definitive legislation saying that PPP expenses are deductible. And,
- It pushes forgiveness into the next taxable year, meaning that expenses paid with PPP funds in 2020 will be deductible, since the loan was not forgiven by the end of the taxable year. This could cause a pickup of income from 2019 into 2020, but realistically we expect the deductibility issue to be worked out by then.
However, understand that this advice only considers the tax angle — I can certainly understand those business owners who just want the loan forgiven so they can stop thinking about it. If you fall in that category, then by all means you can apply for forgiveness. Those are my thoughts on the whole quagmire that is PPP forgiveness. If you decide to apply for forgiveness anyway and run into any roadblocks, let me know.