PPP loan forgiveness and taxes

Eileen Sherr, CPA, CGMA, MT, director of the AICPA’s Tax Policy & Advocacy team in Washington, D.C., discusses recent IRS guidance regarding the tax treatment of loans under the U.S. Small Business Administration’s Paycheck Protection Program (PPP). This guidance holds that the amount of a PPP loan that is forgiven under the SBA’s procedures is not included in the loan recipient taxpayer’s gross income, but any expenses used to qualify for the forgiveness cannot be deducted on the taxpayer’s income tax return as an ordinary and necessary business expense. We also look ahead to what the change in presidential administration in 2021 might spell for a broad range of taxpayers.

What you’ll learn from this episode:

• How PPP loan forgiveness is excluded from taxpayers’ gross income for income tax purposes, but the IRS regards related business expenses as nondeductible.
• The progress of efforts by members of Congress to clarify in new legislation that the PPP forgiveness-related expenses are intended to be deductible as ordinary and necessary expenses of loan recipients.
• What form advocacy on this issue by the AICPA and its members is taking.
• How and when tax law changes proposed by the Joe Biden–Kamala Harris presidential campaign might be reflected in a proposed budget by the Biden administration.

Play the episode below or read the edited transcript:

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.

To comment on this podcast or to suggest an idea for another podcast, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.

Transcript:

Paul Bonner: Hello, and welcome to the JofA podcast. Today, we’re talking with Eileen Sherr from the AICPA’s Washington office. She is director of Tax Policy and Advocacy for the AICPA and will bring us up to speed on the AICPA’s priorities in advocating for members and their clients. One important priority we’ll cover is the tax treatment of loans and their forgiveness under the Paycheck Protection Program, or PPP, which was enacted during 2020 as part of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act.

Hello, Eileen, and thanks for joining us again.

Eileen Sherr: Hello. Good afternoon.

Bonner: I should perhaps start out by saying congratulations on your new title of director of Tax Policy and Advocacy.

Sherr: Thank you. I’m happy to be a director.

Bonner: Yes. We’ve talked before about state tax issues, state and local taxation, and today we’d like to talk about these federal tax issues, particularly pertaining to the PPP program and loans that have been forgiven, which I imagine is most of them that have been given out. The applicants have applied for loan forgiveness, and in many or most cases, I imagine, received it, although there are some split-year considerations we want to get to a little bit later. The PPP program, of course, is administered by the Small Business Administration and provides these forgivable loans to businesses based on their number of employees and other expenses that they maintain during the covered period. And the loan forgiveness is also calculated based on some of these expenses that they’ve had.

Now, the difficulty arises, as you know, with Notice 2020-32 that came out earlier, advising, from the IRS, that these expenses that are used in loan forgiveness are not then deductible as ordinary and necessary business expenses, which would be a double deduction, in essence, they’re saying, right?

Sherr: Correct. Basically, Notice 2020-32 came out, and it was good in that it said that the forgiveness was not taxable, so that was good confirmation on that, but it did say, on the negative side, that the expenses related to the forgivable loans are ineligible for tax deductions, that you get the nontax treatment — you don’t get taxed on the forgiveness, but you also do not get to deduct any business expenses paid with the forgivable loans.

Bonner: That does have a certain degree of logic to it, I suppose, although one could say that the intent of Congress was to provide a benefit here for which that tax principle would not apply. What’s the AICPA’s position on this issue?

Sherr: Correct. The AICPA has sent in letters to Congress saying that we understand the congressional intent of the PPP legislation was to allow both the nontaxable treatment of the forgiveness and also tax business expenses — we think Congress intended to make those deductible as well.

Bonner: Does Congress agree with that reading of its intent?

Sherr: Yes, they haven’t acted quite yet, but it was in the HEROES bill [Health and Economic Recovery Omnibus Emergency Solutions Act, H.R. 6800]; the bill that House Democrats passed for the next round of stimulus did include deductibility for PPP expenses. Expenses that you use your loan forgiveness for would be deductible under the House-passed Democratic bill. Both their bigger bill and their skinnier version had that in it, so we’re happy to see that it was in what passed the House, and also there is bipartisan support in the Congress for this. There’s three bills that are out there: S. 3612, H.R. 6821, and H.R. 6754. All would allow deductibility for the expenses that you are getting PPP loan forgiveness for, as well.

Bonner: And I believe that the AICPA is asking all of its members to write to their congresspersons, and that everybody should do this to try to get Congress to express this through legislation and make it clear that these expenses are deductible, is that correct?

Sherr: That is correct; yes, we are sending — I think today, actually — we are sending something out to the AICPA membership urging everybody to contact their member of Congress about it. We’re hoping that in the lame duck session that they can move forward with it.

Bonner: Now, I imagine that the lame duck session has lots of competing priorities of things they could be taking up. Is it really likely to expect to see movement on these proposals, and if they don’t get to it before adjournment, will it be moot next year?

Sherr: Yes, we do not have much time left. We have about, probably, three weeks after they come back after Thanksgiving to deal with any legislation. The defense authorization bill has to go through. The funding for the government ends Dec. 11 unless they pass a continuing resolution or appropriations bills, or both. So, that’s going to be a priority, and then we’re really hoping that they do take up some more coronavirus pandemic relief. I know the state governments would like them to include something in there and lots of other provisions, and we are really hopeful and trying to work it that this would be included in such a package. If they can negotiate — and obviously, getting anything through Congress is challenging, especially in a few weeks. But they seem to like deadlines, so we’re hopeful that before they adjourn that they would include this in the bill that would include some pandemic relief.

Bonner: I have to imagine there will be at least an attempt for another relief bill, right?

Sherr: Yes, definitely. We are hopeful. The House has passed it; they’re really trying to move forward with it. I think it’s just some sticking points on the amount and how generous the bill will be. We’ll see.

Bonner: You mentioned the skinny HEROES Act; I heard mention the other day of the skinny HEALS [Health, Economic Assistance, Liability Protection and Schools Act], and I had to think about what that meant.

Sherr: Yes. The HEALS is the Senate Republican bill, and the HEROES is the House Democrat proposal, and they just need to come together on some things.

Bonner: Right, they’re just skinny in different ways, aren’t they?

Sherr: They always start with the biggest, the best offer, and then they kind of negotiate down. It’s just the negotiation versions.

Bonner: Right, and then the two chambers have to negotiate with each other, I suppose.

Sherr: Yes, to get a conference agreement.

Bonner: Yeah. So, we could see perhaps one of these bills you mentioned passing, and we could see further aid similar to the PPP program or maybe even an extension of it for more new loans. I don’t think they spent all their authorized money in the first place, right?

Sherr: Right. But we’re hopeful that there will be some more PPP, a phase 2 of the PPP loans, and as more businesses need more help, they would offer it. And that they would add in some more simplified processes for getting the forgiveness, and they would add in 501(c)(6) organizations into the PPP — that would help with state [CPA] societies. And also that maybe they would have a simplified process for getting the forgiveness; I think right now they have $50,000 [maximum eligible loan amount], and I think they’re talking about a $150,000 possibility for the simplified process. Those are all things that are being considered.

Bonner: I looked the other day when you mentioned the 501(c)(6) organizations; I thought, how many are there? There are 29 of them; did you know that? Twenty-nine paragraphs under Sec. 501(c), and I imagine all of them would like to be able to participate in PPP. I think it’s the 501(c)(3)s, primarily, right now.

Sherr: We’re looking at the (c)(6)s in particular; that would help state societies.

Bonner: Those are business leagues and similar organizations, trade organizations, I think.

Sherr: Yes.

Bonner: Now, it’s been hypothesized until fairly recently, what happens for this PPP loan forgiveness and deductibility of expenses where you have a PPP loan granted in 2020, and Dec. 31 comes, and it’s not forgiven. But then later, in 2021, the same loan is forgiven. Maybe the taxpayer has already deducted those expenses, since one tax year stands on its own, doesn’t it? What happens then?

Sherr: Well, the IRS just came out last week — I think it was Wednesday night at 7 p.m. — they came out with two releases, IRS Rev. Rul. 2020-27, and IRS Rev. Proc. 2020-51. Rev. Rul. 2020-27 says that if there’s a reasonable expectation of forgiveness, you are not allowed to deduct it, even if you have not yet submitted your loan forgiveness application or you have not yet received approval of your forgiveness application by the end of the taxable year. So, if you’re planning to apply for forgiveness, you are not allowed to deduct it, according to IRS.

Bonner: “If you’re planning to apply for forgiveness,” you say. Well, I can plan to do a lot of things and they might not come to pass, right? I could make a mistake on my forgiveness application, couldn’t I, that would be fatal to that application. I could realize that I was never authorized to apply for forgiveness for one reason or another. Anything could happen that would wreck that reasonable expectation. What would the IRS do in that instance?

Sherr: That’s why they have Rev. Proc. 2020-51, which gives a safe harbor. It says that if some or all of the loan is not forgiven, then you can deduct those expenses up to the principal amount that is not forgiven. And you can deduct it either on the original 2020 return — so if you find out before you file your 2020 return, then you can deduct it right then and there, or you can amend, if you find out after you’ve already filed that you do not get the forgiveness, then you can amend your 2020 return and deduct those expenses, up to the amount that was not forgiven. Or, in 2021 you can take those business expenses and deduct them. And when you’re filing those returns, you need to include a Rev. Proc. 2020-51 statement that gives some information about the loan.

Bonner: I see. You know, it reminds me of certain situations where the one-tax-year-standing-on-its-own principle comes into play, and that is when one had a reasonable expectation. We see this all the time in disaster loss deductions, for example, when you no longer had a reasonable expectation of repayment through insurance or otherwise, for example. I imagine it could happen the IRS would raise the issue of when you had a reasonable expectation. If it wasn’t until after the end of 2020, is the safe harbor still available? It looks like a problem to me.

Sherr: I think it is, I think the safe harbor’s there for when you find out about your forgiveness. If you find out you did not get the forgiveness, then they’re allowing you to take it and to amend returns. I think the best advice for people is to wait and see what Congress does and if it does allow the deductibility. Wait till March and April next year, so you have a few more months to think about things and see what Congress does before you decide if you’re going to deduct it or not. Also, by then you will, hopefully, have received your forgiveness, and, hopefully, SBA will have confirmed that you have gotten the forgiveness. I would just say, put things off as long as you can, till we know the lay of the land with deductibility, with Congress providing it, or if you find out about your forgiveness from SBA.

Bonner: Yes, we do have some time before 2020 returns are due, I suppose.

But there’s going to be a lot changed in the years ahead, aren’t there, not just 2021, but with a new administration — God and the Electoral College willing — a lot could be different, too. And not only businesses but individuals, estates and trusts, corporations, everybody has to think about how tax policy might change going forward. And there could be new legislation. I’ve heard some talk already of harvesting capital gains in 2020 to take advantage of the rates now, versus what they might be next year or later. How do you assess — what’s in your crystal ball right now?

Sherr: Obviously, with a new administration, we always get new proposals. Usually around February, the administration releases their budget proposals, and that’s going to be the beginning of what the new administration would like to see for revenue for the year and for different budget things. And usually, for tax provisions that are proposed, we’ll find out more details then. Right now, we just are working off what was in the campaign and various different proposals there. It’s possible that things could change, especially with the virus and having to fund different things; we’ll have to see. It’s possible the corporate tax rate could change from 21% to 28%. I also want to mention that the TCJA [the law known as the Tax Cuts and Jobs Act, P.L. 115-97] provisions, a lot of them, the individual ones, will expire at the end of 2025, so things will change at that point unless Congress acts. So we’ll have to watch that.

Going back to the administration proposals, there was also a 21% minimum tax on all foreign earnings of U.S. companies that’s been proposed and a tax penalty for companies who shift jobs overseas. There’s been talk of a 15% minimum tax on book income, but we really don’t know the details on that. There’s been talk of — basically only the high-income individuals, and what they defined during the campaign as $400,000 or more, so it really just affects the really high-income people — would see the marginal tax rate go up to 39.6%, like what we had under prior administrations. The individual capital gains rate would increase for those over $1 million. They’re really just trying to target the high-income individuals.

There are some tax cuts that we’ve heard about as well, that there would be increased tax credits to afford health insurance, there would be an increased child care tax credit, and then an increased child tax credit, and then a $15,000 first-time homebuyer’s credit. So, there’s some good and some bad that’s been suggested.

There may be an elimination of like-kind exchanges — that’s been proposed — and reducing the GILTI [global intangible low-taxed income] deduction from 50% to 25% of the income. So those are some things that have been out there listed. Also, treating capital gains as normal income for investors, again, over $1 million. So, that would be changing that for the millionaires. And a Social Security payroll tax for income over $400,000, and I think that’s been called a doughnut. Basically, right now, Social Security taxes go up to $137,500, I think [$137,700 for 2020 and $142,800 for 2021], and then there wouldn’t be any tax until $400,000, and they would start taxing again over $400,000.

Bonner: My goodness. That would be a lot. You know, 2017 was billed as an epochal tax reform, and it boggles the imagination to have another one so soon.

Sherr: We’ll have to see. With the Senate race, we’ll have to see what happens in early January with the Georgia runoffs there, and that’s really going to depend on whether anything’s going to move or not this year, whether it could be gridlock again or if there will be legislation. Stay tuned.

Bonner: All right, we’ll stay tuned for that. And meanwhile, if you’re an AICPA member, you would tell them what?

Sherr: Basically, listen to our updates, and we’ll keep you advised on what’s going on, what’s being proposed, and the AICPA Tax Section will be definitely giving out updates as things happen. And our AICPA Tax Policy and Advocacy group will be advocating on these issues. We have various committees and technical resource panels that will be studying and analyzing these proposals, and we’ll be commenting and giving insight to Congress on them.

Bonner: OK. Well, thank you very much, Eileen, and we’ll talk again soon, I’m sure.

Sherr: Definitely; nice talking to you, Paul.