Is it just me, or is the PPP loan portion of the CARES Act a huge conundrum that just makes you want to crawl under a rock until it’s all over?

Usually around this time of year, we are ready to deep dive into some tax planning – however the PPP loan has thrown a huge wrench in what we have known as a normal tax year.

The IRS has recently doubled down on what we thought we heard them say earlier in the year. ANY eligible expenses, that are otherwise deductible, are excluded from deductibility in the current tax year, if the taxpayers PPP loan is forgiven. Yep, you heard it right! If a businesses PPP loan is forgiven, any of the eligible expenses paid with PPP loan funds aren’t deductible in 2020.

What if the taxpayer hasn’t received a final determination as it relates to forgiveness by the end of 2020? Or why not just hold off on applying for forgiveness? Oh no no – they were a step ahead! The Treasury Department specifically stated that “If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.” So, they are actually encouraging taxpayers to go ahead and apply for forgiveness.

Now, there are 2 exceptions to the rule that would allow deductions in 2020 (or as they call it – a safe harbor)

  • If the taxpayer decides not to apply for forgiveness at all, or
  • In a subsequent year if forgiveness is denied entirely or in part

Is this what Congress intended when passing the CARES Act? Of course not. I mean after all; the law was put into place to help small businesses during economic uncertainty. However, while the CARES Act specifically stated that any PPP funds would not be included in gross income, they failed to address the deductibility of expenses during the initial passing of the law.

So, is this over? May or may not be! We are still waiting to see if Congress will pass legislation reversing what the IRS’s treatment of expenses paid.  In the meantime, we at RDJ CPA will stay up to date on the ever so changing laws and keep you updated.

Make sure to visit our website, sign up for the blog and “All Things Entrepreneur”. Until next time…

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