Many businesses have used their Paycheck Protection Program (PPP) funds and are in the process of gathering documentation to complete and submit loan forgiveness applications. Despite the many updates the Small Business Administration has made to its frequently asked questions and interim guidance, one big question remains: will there be a correction to address the tax treatment of loan forgiveness under the PPP?
A bit of background
Forgiveness of a debt is generally taxable. Businesses receiving PPP loans were excited that the CARES Act excluded PPP loan forgiveness from taxable income. However, the excitement was short-lived. Under existing Code Section 265, expenses related to non-taxable income are not deductible. The IRS confirmed in a Notice issued in late April that it would deny deductions for any expenses for which a taxpayer receives PPP loan forgiveness in accordance with Section 265. The bottom line is that a taxpayer will pay tax on the amount of PPP loan forgiveness it receives.
To Pay or Not to Pay?
Some believe Congress did not intend for the expenses related to PPP loan forgiveness to be non-deductible. Many, including the American Institute of Certified Public Accountants, are asking for further legislation or a technical correction to the existing legislation to allow a tax deduction for all expenses incurred even if they were paid using PPP funds.
In the meantime, third quarter estimated tax payments are due in less than a month for many taxpayers. Should PPP recipients include the loan forgiveness in taxable income when determining third quarter estimated tax payments? Or is it better to wait to see what actions Congress may take to correct the statute? If a company chooses the latter, does the company know how much additional tax to expect if there are no corrections to the CARES Act?
The “right” answer may be different for each taxpayer. We recommend discussing your situation with your MarksNelson tax adviser to determine the best course of action for you.