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, while groups including the American Institute of CPAs are complaining about a new, lengthy questionnaire from the SBA for forgiveness of loans of $2 million or more.
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.
"This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket," said the Treasury in a news release. "If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible."
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In cases where a PPP loan was expected to be forgiven, but it isn’t, businesses will be able to deduct those expenses. “Today’s guidance provides taxpayers with greater clarity and flexibility,” said Treasury Secretary Steven Mnuchin in a statement Wednesday. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”
The revenue procedure issued by the IRS and the Treasury, Rev. Proc. 2020-51, provides a safe harbor for PPP loan participants whose loan forgiveness has been partially or fully denied, or who decide to forego requesting loan forgiveness, to claim a deduction for certain otherwise deductible eligible payments on (1) the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 taxable year, or (2) an amended return or an administrative adjustment request (AAR) under section 6227 of the Tax Code for the 2020 taxable year, as applicable. For taxpayers who decide to forego requesting loan forgiveness, the safe harbor also permits these taxpayers to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness.
The revenue ruling, Rev. Rul. 2020-27, offers guidance on whether a PPP loan participant that has paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. The revenue ruling also includes guidance if, as of the end of the 2020 tax year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.
Both pieces of guidance answer some questions, but some tax experts will still have questions. “While the Ruling and Rev Proc provide information on the deductibility of expenses and the tactical approach for borrowers whose forgiveness is denied or not requested, additional clarification is still needed,” said an email to clients Thursday from Aprio, a Top 100 Firm. “This guidance does not address the order in which the eligible expenses (payroll, rent, utilities and mortgage interest) lose the ability to be deducted. Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:
- Qualified business income deduction (Section 199A);
- Research and development credits; and
- Interest deduction limitation (Section 163(j)).
The IRS and the Treasury also recently released guidance in Notice 2020-32 about deducting expenses for PPP loans. The notice clarifies that no deduction is allowed under the Tax Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the CARES Act, and the income associated with the forgiveness is excluded from gross income.
The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.
Loan necessity questionnaire
Separately, the American Institute of CPAs joined with more than 80 other trade and business groups in a letter Tuesday expressing concern about the loan necessity questionnaires being sent by the SBA to PPP borrowers who received loans of $2 million or more. They complained that the questionnaires are long and burdensome and require extensive documentation.
“We strongly believe that the vast majority of small businesses needed their PPP loan to stay in business and retain employees, and many still need additional financial support,” said Erik Asgeirsson, president and CEO of CPA.com, in a statement. “These ongoing changes and new requirements could impact future business decisions on applying for more relief.”
In the letter, which was sent to House Speaker Nancy Pelosi, D-California, and House Minority Leader Kevin McCarthy, R-California, Senate Majority Leader Mitch McConnell, R-Kentucky, and Senate Minority Leader Charles Schumer, D-New York, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza, the AICPA and the other business groups suggested that existing PPP Forgiveness Applications — specifically, SBA Forms 3508, 3508EZ and 3508S — should still be used because they “…allow the agencies to examine, in greater detail and prior to the approval of loan forgiveness, relevant facts to ensure that the PPP loan funds were used in the way Congress intended.”
They pointed out that the new questionnaires focus on the wrong time frame during which the PPP loan must be assessed by asking for gross revenue comparisons between 2020 Q2 and 2019 Q2 and other metrics and narratives that describe how the borrower has fared during the pandemic. However, they noted, PPP borrowers were required to certify in good faith that the loan was needed at the time of the request. “Any circumstances that happened after the certification was made and throughout the pandemic should have no bearing on evaluating the borrower’s good fair statement at the time it made the certification,” said the letter.
In addition, the new forms ask for liquidity and revenue data, which could expose the personal finances of small business owners. “The CARES Act did not include a means-based test, revenue reduction test, liquidity test or any other metric to assess financial standing in order to assign prioritization of PPP loans to certain borrowers over others,” said the letter
The AICPA and the other groups, including the American Bankers Association, the National Association of Manufacturers and the U.S. Chamber of Commerce, also argued that questions about revenue and liquidity data signal a bias against PPP borrowers who have managed to survive or remain profitable during the pandemic. Steady or increased revenue with healthy liquidity and continuing employment is a sign that the PPP loan was successful, they pointed out.
Other questions in the form prompt concerns that a borrower’s answer could lead to a misinformed analysis by the agencies. For instance, requests for statements on whether closures or changes in operations were mandatory or voluntary and details on which governmental jurisdiction mandated the closures.
The questionnaires also apply impractical compliance deadlines on borrowers and lenders that would be impossible in many cases, the AICPA and the other business groups note. “The nine-page questionnaire demands a level and type of reporting never previously required from borrowers by statute or in any process in PPP lending thus far,” they wrote.
