Entrepreneurs anticipating paycheck safety mortgage forgiveness can not deduct prices
The headquarters of the Internal Revenue Service (IRS) in Washington, D.C.
Janhvi Bhojwani | CNBC
Business owners who took out forgivable credit this year may not be able to write off certain expenses on their taxes if they expect the debt to be forgiven, according to the IRS and Finance Department.
The two agencies on Wednesday issued guidelines on the paycheck protection program – an emergency funding line for small businesses established by the CARES law.
Generally, applicants are eligible for a loan if they use at least 60% of the proceeds towards labor costs. Companies that fall short can be partially awarded.
Although the program generated a lot of interest – more than 5 million loans approved, equivalent to $ 525 billion – the question remained whether small businesses would be allowed to claim deductions for costs covered by PPP funds.
The IRS and Treasury action seems to solve the problem.
Firms that "reasonably believe" that their loan will be granted in the future may not be able to deduct those costs – whether or not they asked for forgiveness, the agencies said.
Finding frustrated tax professionals fearful that borrowers' income will appear higher on paper if they cannot deduct the expenses. In return, their taxes for 2020 will be higher even in times of tight budgets.
"These companies got their PPP loan, spent the money and nothing left, and they are practically out of business or doing significantly less than nine months ago," said Adam Markowitz, registered agent and vice president of Howard L Markowitz PA CPA in Leesburg, Florida.
"Now they're getting a tax bill like they're making money all the time," he said.
Senator Chuck Grassley (R-IA) speaks on the third day of the confirmation hearing of Supreme Court Candidate Amy Coney Barrett before the Senate Judiciary Committee on Capitol Hill in Washington, DC, the United States, on October 14, 2020.
Erin Schaff | Reuters
Earlier this year, the IRS said that while granting the loan would be tax-free, borrowers would not be able to deduct their expenses.
Allowing tax-free forgiveness and deductibility would be a double benefit, the agency concluded.
Legislators on both sides of the aisle disagreed and proposed laws that would allow depreciation.
The Small Business Expense Protection Act of 2020 is endorsed by Sens. Chuck Grassley, R-Iowa. John Thune, R-S.D. And Ron Wyden, D-Oregon.
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Rep. Richard Neal, D-Mass., Who is also the chairman of the House Ways & Means Committee, also supports the deductibility of spent expenses.
This suggests that Congress may revisit the problem in another Covid-19 relief bill. When this will happen is still uncertain, as lawmakers have spent most of the year arguing over the next round of aid.
"Thune and Neal disagree on a lot of things, but the fact that they do agree is a good indicator that it will happen," said Ed Zollars, CPA and partner at Thomas, Zollars & Lynch in Phoenix and to instructors at Kaplan Financial Education.
No forgiveness? You can pull it off
While the tax inspector does not allow applicants to seek both forgiveness and tax deduction, the IRS also said Wednesday that entrepreneurs whose PPP loans fail may be able to deduct their expenses.
"If it turns out that your expectations were overly optimistic, there is a special rule that you can use to recover from that scenario," Zollars said.
In this case, applicants can write off their returns for 2020 or 2021.
Amounts that are not awarded must be repaid. PPP loans have an interest rate of 1%. Loans issued before June 5 typically have a term of two years, while loans issued after that date have a term of five years.
Waiting could make sense
Even with this guidance from the IRS, there is still an opportunity for Congress to develop legislation to allow for deductible expenses.
Business owners who have taken out PPP loans should prepare for an extension when they file their 2020 tax returns next spring, Zollars said.
"We potentially get the deduction if Congress passes this," he said. "There's a reasonable chance we'll get relief, but there's no guarantee."