This last year has brought on so many changes and unknowns, and has taken a toll on our emotions. People have been out of their comfort zone not knowing what to expect or how to navigate these unprecedented times. While new programs and laws were passed to try and help families and businesses make it through monetarily, many of these provisions (while nice) have also caused some extra headaches and stress.
Many provisions initially came through the CARES Act in March of 2020. Stimulus checks, expanded unemployment benefits, an extension of who can collect unemployment, and the Paycheck Protection Program (PPP loans) are a handful of these benefits. While there have been some questions as to how all these will impact each person, the PPP loans in particular have led to many questions. Here are a few clarifications.
Will the loans count as taxable income?
The CARES Act specifically provided the guidance that these PPP loans, when used for qualified expenses (i.e. payroll, rent, utilities), and documented correctly, will not only be forgiven, but also will NOT be included as taxable income. This alone is quite the benefit to help cover expenses, all the while not counting as income.
However, the question remains whether expenses paid for using PPP loans would still be deductible for businesses.
IRS says not deductible
The IRS originally came out with a notice 2020-32 in April of 2020 contradicting the intent the law makers wanted. It clearly stated that any expenses paid by forgivable non-taxable loans would NOT be tax deductible.
An interview with the Treasury Secretary Steven Mnuchin stated that “the money coming in the PPP is not taxable. So if the money that’s coming is not taxable, you can't double dip.”
This sounds exactly like how the IRS usually rules. They don't like giving double benefits to taxpayers. For instance, if a contractor does a job for a client and charges $2,500, but does not get paid, he can't therefore turn around and claim a loss for $2,500. In other words you can't write off the amount you already didn't claim as income. With that said, any actual expenses incurred for doing the job would still count, just not the loss of not getting paid.
Many disagreed with the IRS. But in November of 2020 the IRS reiterated its position in another notice, Rev. Rul. 2020-27, again stating that these expenses would not be qualified deductions if they were paid from a forgivable PPP loan.
The difference
As was mentioned earlier, the IRS doesn't usually allow any type of "double dipping" when it comes to income and tax deductions. This is a different situation though as pandemic restrictions and shutdowns caused severe hardships for many businesses. Many were forced to close completely for a while, others saw huge setbacks in income. The provision of the PPP loans was to help recoup this loss of income, while still trying to pay employees and expenses along the way.
Not allowing these deductions would just further hurt the impacted businesses and not give the complete help needed that was originally intended by the CARES Act.
A better law
Finally, on December 27th, 2020, a COVID-related Tax Relief Act of 2020, amended the CARES Act to specify that no deduction would be denied, no tax attribute would be reduced, and no basis increase would be denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan.
In other words, all the normal expenses are still deductible no matter the source of income -- PPP loan or otherwise. Not only does this apply for 2020 but all future tax years where expenses were paid with this type of loan.
Therefore, the new loans rolling out for 2021 will also be allowed to be forgiven, are not taxable, and the expenses paid will still be deductible. This provision truly will give some much needed help to struggling businesses. Although the last year had much uncertainty, at least a little clarification and help has arrived. If you are in need, take advantage of these programs, that's what they're there for.
If you are overwhelmed with all the new provisions and how they will impact your taxes, please feel free to contact us. We can help take some stress away by preparing your tax return, making sure you get all the qualified deductions that apply to you, and help you prepare a financial plan for uncertain times.