Unsure Whether You’ll Lose Tax Deductions for a Forgiven PPP Loan? Wait Until 2021 to File for Forgiveness

PilieroMazza PLLC

PilieroMazza PLLCAs it hashes out the details of the next COVID-19 relief package, Congress is facing pressure from business groups to allow businesses to write off expenses covered by forgiven Paycheck Protection Program (PPP) loans. The groups explain that, without write offs, “millions of small businesses . . . will face a surprising, and, in many cases, insurmountable tax bill next year.” We have received questions about the quagmire of regulations covering tax treatment for businesses when PPP loan balances are forgiven. Our advice? If you have not filed a forgiveness application, consider waiting until next year.

Tax Debate

The PPP created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act offered much-needed financial relief to businesses directly impacted by the COVID-19 pandemic. Through the program, eligible businesses could obtain a loan designed to keep employees on the company payroll, even when company revenues were impacted by stay-at-home and social distancing orders. In many cases, PPP loans are eligible for total forgiveness, saving companies from the additional financial burden of paying back an often sizeable loan. The Internal Revenue Service (IRS) normally considers it taxable income when a loan is forgiven, but the CARES Act specifies that, in the case of a PPP loan, it is not.

While forgiveness is tax free, the IRS says borrowers cannot deduct expenses covered by the loan. Given that these expenses include things like employee pay and rent, many small businesses are not receiving what would be significant deductions in a normal year. The IRS has even said that if a PPP borrower “reasonably expects to receive forgiveness,” then the borrower may not deduct those expenses in the year they were paid. Businesses unable to deduct expenses covered by their PPP loan could face much larger than expected taxes, so they’re pushing back.

When Is the Forgiveness Application Due?

If you haven’t filed for forgiveness, it may be worth waiting. You can submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. If you do not apply for loan forgiveness within ten months after the last day of your loan forgiveness covered period, loan payments are no longer deferred, and you must begin making payments on the loan. For example, if your covered period ends on October 30, 2020, you have until August 30, 2021, to apply for forgiveness before loan repayment begins.

If you do not want to begin making payments, you must apply for forgiveness within ten months after the last day of your loan forgiveness covered period. Many borrowers have until well into 2021 before they have to start making payments, so it is likely worth waiting to see if the Congress resolves the tax debate or legislates other measures that would impact PPP loan forgiveness.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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