It has been a while since any real law changes or updates to the PPP program have come through but now we have some new developments that are worthy of a new discussion. I wanted to put down my thoughts on just where we stand on PPP Loan Forgiveness timing and what I see as the path forward as of November 20th.
Congress has still not acted. That means your expenses that were paid with PPP money are not going to be deductible as of today. I am still hopeful they will allow that, but the timing of when Congress will act is probably at least a few weeks away yet, hopefully in the lame duck session but that’s unknown. Uncertainty is bad news and it continues to be uncertain. Personally, I think there is still a 75% chance that ultimately Congress will act and you will be allowed a deduction. Keep that in mind when doing your tax planning this year. That means there is a 25% chance you don’t get a tax deduction for those expenses paid with PPP funds.
The new development in this area is from the IRS, which came out with some guidance November 18th. They released Revenue Ruling 2020-27 and Revenue Procedure 2020-51 which get at the same conclusion – your PPP expenses are not deductible in 2020. The IRS makes it clear their position is that if the taxpayer has a reasonable expectation of forgiveness then a taxpayer cannot deduct any PPP expenses on their 2020 tax return. Before this guidance, there was some gray area about which year you would lose those deductions. Now it is clear those deductions will be lost in 2020 even if you have not yet applied for the forgiveness, or if you did apply but haven’t received a response yet.
So realistically what does that mean for tax planning and for the timing of filing your forgiveness application? For tax planning you need to have two scenarios: one without the PPP deductions and one with the deduction. Current law is without the deduction, but I still see a 75% chance that Congress acts sometime to allow that deduction, so I think it’s still worth modeling both scenarios.
For taxpayers with R&D credits or with QBI limitations on wages, I think waiting to apply can still make sense so you can potentially strategically complete your forgiveness application to preserve as much wages as possible. For taxpayers with loans over $2M, new forms recently came out and I could see those changing again. Extra caution should be taken in those situations. Certainly for taxpayers that are shy of 100% forgiveness and they need until 12/31 to be restoring FTE or restoring wages, those taxpayers should wait. For taxpayers without one of those specific issues I think most should feel good about submitting their forgiveness applications now. I see no reason to delay submitting the forgiveness application for the majority of taxpayers. Certainly there is no need to rush. A business has 10 months from the end of their 24 week period which gives you plenty of time, but if you have thoughtfully put together your PPP Forgiveness Application and you have all the documentation ready and you are lined up for 100% forgiveness, you might as well submit it to the bank and start the official process.
I’m not sure if I explained that well. It’s really a technical issue and there is a lot to digest, so I’ll summarize my current opinions like this:
- 75% chance you get a tax deduction and it’s not going to matter what year you submit your PPP forgiveness.
- 25% chance you do not get a tax deduction, and it’s not going to matter when you submit your PPP forgiveness, those nondeductible expenses will be in 2020.
- Unless you have a specific reason (R&D credit, QBI wage limitation, loan of $2M+, 12/31 restorations), I see no reason to delay submitting your PPP forgiveness application once your 24 weeks is completed and you are expecting to receive 100% forgiveness and the forgiveness application has been thoughtfully prepared.
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