This article was written on November 23, 2020.  Be sure to check for more developments as time passes.

Congress passed the CARES Act last spring, creating the PPP loan program and criteria for loan forgiveness.  The Act specifically provided that any forgiven principal would not result in taxable income, which is usually the case with forgiveness of debt (the most notable exception being in cases of insolvency).  Early on however, IRS issued guidance that expenses paid with tax-exempt income (specifically, PPP loan forgiveness) are not deductible, which pretty much gets to the same result of increased taxable income.

IRS’ position led many advisors to recommend that borrowers drag their feet in applying for forgiveness, with the thought that if none of the loan is actually forgiven in 2020, all 2020 expenses should be deductible.  That defers the problem to next year, but in the process buys some time for Congress to intervene.  Apparently IRS got wind this was becoming a common recommendation, and last week they issued further guidance doubling down on their position.  Now their position is that to the extent a borrower “reasonably expects” loan forgiveness, the related expenses aren’t deductible in 2020 even if forgiveness isn’t finalized until 2021.

In our view, IRS isn’t really picking a fight with Congress, they’re just following long-established law.  In their rush to pass the CARES Act however, Congress didn’t dot all the i’s and cross all the t’s.  Ever since IRS pointed this out last spring, we have expected Congress to pass additional legislation to ensure their original intent is carried out.  Unfortunately, to date that hasn’t happened, and in the current political environment, it’s hard to predict if it ever will, or if it does, when.   Maybe they’ll let things stand as is and try to put IRS in the role of bad guy when borrowers owe tax due to forgiveness.  Maybe they’ll get around to it next spring and make changes retroactively.  Maybe they’ll address the issue but put more qualifiers on it to “weed out” companies they don’t think “deserve” the tax windfall of loan forgiveness and full expense deductions.  Especially if it isn’t resolved by the time Congress closes their session this year, who knows what this might look like?

We don’t think we’ve heard the final word on this issue.  For now, we recommend planning as if the IRS position will hold as the worst case scenario, and assume expenses related to forgiven PPP loan proceeds won’t be deductible.  If that is later overturned or modified, then PPP borrowers will be that much better off.  In the meantime, we suggest extending affected 2020 returns until the dust finally settles to avoid having to amend later if things change.

Although the current scenario is fraught with uncertainty, there are still important strategy decisions to maximize PPP loan forgiveness, and planning opportunities in light of it.  There is an old saying that when times are good, you need a good advisor; when times are bad, you REALLY need a good advisor.  If you could use some help to navigate your way through these uncertain times, we would be happy to have a conversation.  Feel free to get in touch to schedule a phone appointment with one of our business or tax advisors.