I sometimes listen to music while working. I have a ~900 song playlist I cycle through, and today White Lion’s Wait came on. (White Lion was a hair band–if you watch the linked video, you will see why.) And it seemed an entirely apropos title to this post: a post where we’re dealing with PPP loan forgiveness.
Earlier this year many businesses applied for Paycheck Protection Plan (PPP) loans. These seemed like a great deal for struggling businesses: Use them for payroll or certain other expenses (rent, utilities, etc.) and the loan would be forgiven. It was money from the US government to help small businesses make their way through Covid.
Congress’s intent (at least according to Senators Grassley and Wyden) was that businesses would be able to receive the loan, have the loan forgiven (assuming the expenditures were used as noted above), and the loan would not be considered income. The IRS, though, had another idea. Sure, the loan isn’t income; however, the expenses would not be deductible: the IRS noting that per Section 265 of the Tax Code if you have nontaxable income, expenses used in production of that income are not deductible. Senators Grassley and Wyden complained earlier this summer when the IRS first announced this. The IRS double-downed on this, releasing Revenue Ruling 2020-27 and Revenue Procedure 2020-51 confirming the IRS’s initial position. Senators Grassley and Wyden complained again.
A few tax professionals have argued the IRS got this wrong. Unfortunately, a literal reading of the Tax Code verifies what’s in Section 265 of the Tax Code. That said, Congress can override this. They could, for example, write a new law stating that PPP loans that are forgiven do not cause the expenses used in production of that income to be taxable. Indeed, there is legislation pending in Congress to do just that. Whether such legislation passes is another question though. The legislation does have bipartisan support, so there is a good chance it passes either in the “lame duck” session or early next year.
So what should someone do who received a PPP loan? Generally, they should wait to request forgiveness. (An exception is a sole proprietorship who used the funds for replacement of the owner’s ‘pay’. Because such pay isn’t taxable, there are no expenses which would be non-deductible.) Generally, you have ten months from the end of the PPP covered period to request forgiveness. We’re likely to have clarity on this sooner rather than later (I’m hopeful we’ll know by February), so if you can wait do so.
Indeed, given the rules and procedures the IRS came up with in Revenue Ruling 2020-27 and Revenue Procedure 2020-51 it’s a good idea to know what the exact forgiveness is before filing your 2020 return…and that could be five months after applying for forgiveness. As always, it’s better to extend than amend. Yes, there are going to be quite a few extensions filed by PPP loan recipients in 2021.