Tax filing for 2020 will likely be more… interesting than normal. But after the year that was 2020—complete with a pandemic, recession, and election—what else would you expect?
For those in the accounting and corporate finance space, added intrigue means added headaches, and as you prepare to file, expect a lot of unexpected twists and turns. Possibly the most pressing of these? Understanding how the PPP is going to affect taxes.
PPP Loans and Forgiveness Continue to Change
The Paycheck Protection Program saved business—but there was a catch or two behind it. Forgiveness applications, initially considered one of the complicated areas of the program, still hold their own mystique. The forgiveness questionnaire is still sparking debate. Many firms are putting effort into launching tools to help with forgiveness applications. Nothing is certain.
Well… except for the fact that you’re going to be paying taxes at some point. This is going to be affected by PPP forgiveness, and the IRS and Treasury are working relentlessly to clarify or change procedures.
Understanding Reasonable Expectations
Rev. Rul. 2020-27, offers guidance on whether a PPP loan participant that has paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan.
Forbes Senior Contributor and Tax Partner at RubinBrown Tony Nitti breaks this down in much more understandable terms. Among his notes:
- Even those incredibly well-versed in tax law were taken for a loop over the course of 2020. Nitti was willing to admit the number of times the PPP has made him ‘wrong’. IRS changes have been somewhat counterintuitive and 2020-27 is no different.
- The ruling is controversial and unclear. According to the Ruling, it matters not whether the application for forgiveness has been filed by the time the tax return is ready to go; rather, what matters is that the taxpayer apparently knows, in their heart of hearts, that the loan will ultimately be forgiven.
- Reasonable expectation is a nebulous term (so is clear and readily accessible guidance). According to Nitti, it would appear that if a taxpayer “reasonably expects” to have its PPP loan forgiven, expenses paid with the loan proceeds are not deductible on the taxpayer’s 2020 tax return, even though forgiveness, if achieved at all, may not be received until late in 2021.
Nitti explains in greater detail the two scenarios for forgiveness discussed in 2020-27, explaining the continued challenge and complexity in filing. However, there is hope in Rev. Proc. 2020-51.
Foregoing Forgiveness, Deducting Denials: Safe Harbor Procedure
Accounting Today recently highlighted IRS and Treasury Revenue Procedures, specifically touching on Rev. Proc. 2020-51 safe harbor provisions.
According to Nitti, this is good for taxpayers who guess wrong about deductibility and deny deductions in 2020 only to discover in 2021 that a lesser amount of forgiveness is granted.
These provisions provide a safe harbor for PPP loan participants whose loan forgiveness has been partially or fully denied, or who decide to forego requesting loan forgiveness. Accounting Today notes that taxpayers may claim a deduction on otherwise deductible eligible payments on either:
- The taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 taxable year, or
- An amended return or an administrative adjustment request (AAR) under section 6227 of the Tax Code for the 2020 taxable year, as applicable.
“In simpler terms, this means that if a taxpayer has “non-deducted eligible expenses” for 2020, those expenses may nonetheless be deducted on the taxpayer’s 2020 tax return if the taxpayer gets word that forgiveness is disallowed, in whole or in part, before filing its 2020 return. Likewise, the Revenue Procedure provides that if a taxpayer decides before filing its 2020 return NOT to apply for forgiveness, the expenses may be deducted on that return. […]
Thus, if a taxpayer disallows $100 of expenses on its 2020 return in anticipation of $100 of forgiveness, but only $60 of forgiveness is granted, the taxpayer can either amend the 2020 return to claim the extra $40 of deduction, or deduct the $40 on its 2021 return.”
The full Forbes article goes on to discuss a lot more nuance in the filing process, specifically noting challenges this may create for a self-employed individual filing a Schedule C, the determination of which expenses are nondeductible, the balancing act that a business owner may have to play if eligible for Section 199A deduction, and more. A highly recommended read.
Uncharted Waters: PPP to Create More Problems in Tax Filing
If you thought the SBA forgiveness applications were challenging, just wait when additional departments in the alphabet soup of Federal Agencies get involved. Stay tuned for all the latest news and analysis from the Controllers Council, and discuss how you are adjusting in our forum (just one of the many benefits of membership). Click here to learn more about joining.
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