Under the CARES Act, Congress said that the PPP (Paycheck Protection Plan) loan would be tax free. Initially, it’s a loan but then you can apply for forgiveness. It then becomes a grant. Congress specifically said the grant was tax free.
But then the IRS rules that sure, the money could be tax free, but you had to subtract the amount you received from your deductions. In essence
If you EXPECT to receive forgiveness in 2021, you have to reduce your expenses in 2020. For example, let’s say you received $10,000 in PPP loans. You then received forgiveness. Your deductions have to be reduced by $10,000. In essence, the loan/grant is thus taxable.
That’s something that Congress explicitly said would not happen.
Congress said that they would fix it but then they got busy with other things and a lot of partisan politics. The end results are that nothing happened, at least so far.
That means that the PPP loan forgiveness is taxable
Now we have a new ruling from the IRS (Revenue Ruling 2020-27) and it’s not good news.
The IRS now says firms can’t deduct such expenses paid or incurred in 2020 if firms reasonably expect at year-end to receive forgiveness of the debt in 2021. In other words, even if the PPP is still a loan in 2020, you have to treat it as forgiven and thuspay tax on it.
We’ll see if Congress acts before year end. Personally, I think it’s unlikely.
What can you do now to pay less tax? Get your year-end tax strategy in place now!