Berenson: Tax Effects of PPP Loans and Loan Forgiveness
authors D.S. Berenson | December 16, 2020
Many remodelers and home improvement companies applied for and received Paycheck Protection Program “loans” from part of the federal government’s massive COVID-19 relief package. Today, as the year-end approaches, the tax implications of PPP loans are on the minds of many, specifically the treatment of expense deductions. Those implications differ depending on whether the loan has been officially forgiven or not. Below D.S. Berenson considers both scenarios.
Scenario No. 1: Expense Deduction with PPP Loan Forgiveness
Let’s say you are a calendar-year taxpayer, and you received a PPP loan in 2020. Of course, you used some or all of the PPP loan to pay for business expenses – expenses you would normally deduct on your 2020 tax return. If you have a reasonable expectation of the PPP loan being forgiven, then you should not take deductions on your tax return for those expenses. It does not matter when you apply for the forgiveness, or if the forgiveness occurs in 2020, or not until 2021—the IRS will disallow those deductions if you are audited.
Scenario No. 2: Expense Deductions and No PPP Loan Forgiveness
What if you don’t end up getting loan forgiveness, or you only get partial loan forgiveness? If (i) you used the loan proceeds to pay for eligible expenses in 2020 and (ii) you submit a loan forgiveness application in 2020 or 2021, and you do not get loan forgiveness, then you can deduct the unforgiven eligible expenses in 2020—either with an amended tax return or if you have extended the due date for your 2020 tax return.
Since filing an amended tax return is always a dangerous thing, clients should consider extending their 2020 tax returns to see how the loan forgiveness process ends up. Congress and the SBA continue to try to come up with a definitive determination on forgiveness and expense deductibility so it is a good idea to wait until we see the next round of guidance. It is possible the next Congress will allow a business to deduct expenses even if those expenses were paid with PPP loan proceeds. Also, keep in mind that there is a distinct possibility that individual and corporate tax rates may rise in the near future, so deductions taken in 2021 could be more valuable to taxpayers than they are in 2020. QR
D.S. Berenson is Managing Director of Berenson LLP, a law firm that specializes in home improvement management issues.