The Internal Revenue Service and the Treasury Department have issued guidance to clear up the tax treatment of expenses when a loan from the Small Business Administration’s Paycheck Protection Program hasn’t been forgiven by the end of the year.
The IRS and the Treasury issued both a revenue ruling and a revenue procedure, essentially saying that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible. Revenue Ruling 2020-27 addressed the timing issue. Here two different sets of facts and circumstances that are mentioned in the ruling.
First is if an entity received a loan in 2020, put in for forgiveness in 2020, has reasonable expectation of receiving forgiveness, but does not receive forgiveness until 2021. The second is if an entity received a PPP Loan, has a reasonable expectation for forgiveness, but did not apply for forgiveness in 2020. In both circumstances the entity knows the amount it expects to be forgiven.
The IRS has ruled that in both instances, the entity cannot deduct the expenses involved in forgiveness in 2020. The entity must pay the increased income tax in 2020 rather than in the following year.
We highly encourage you to schedule a meeting with us to go over your 2020 tax liability to avoid surprises.
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