Whooooeeeee! As business owners, we’ve been on a crazy rollercoaster this year. When can we get off? One of the good parts of the “2020 ride” has been Congress passing the PPP Loan program to help small businesses survive. It has been estimated that without the PPP Loans, a LOT more small businesses would have closed their doors permanently by now. Congress specifically stated that the forgiveness of the loan was to be a NON-TAXABLE event. But, the IRS, doing what they are best at, threw cold water on that. They found a loop-hole to make the PPP Loan forgiveness a taxable event.
Then, just to make sure we all understood how mean and rotten they are, they recently came up with Rev Ruling 2020-27 and Rev Proc 2020-51.
Basically, Rev Ruling 2020-27 says, “If you expect to have the loan forgiven, but haven’t received official notice yet before the end of 2020, you may not deduct any normally deductible expenses paid with the proceeds of that loan.”
So, darn it! CPAs (including our firm) had been employing a strategy to defer requesting the PPP Loan to be forgiven until early 2021. Thereby causing the loan to be still on the books at the end of 2020. The argument was that the expenses paid with the PPP Loan were still deductible since they were paid with loan proceeds rather than the forgiven PPP Loan. Then in 2021, when the loan was forgiven, it would be non-taxable because there would not be any 2021 expenses paid with the forgiven loan proceeds.
The Rev Proc 2020-51 created a Safe Harbor rule, that if you attach a statement to your 2020 return, saying, “I have not had the PPP Loan forgiven and I do not plan on requesting forgiveness, but instead, plan on paying it back.” you may then deduct the expenses that you used the PPP Loan to pay in 2020.
How nice of the IRS! They want to see you repay the loan, rather than get the “free” money that Congress intended to give you to help save your business from going under this year.
Now, after paying the taxes caused by the PPP Loan being forgiven, many businesses may end up closing, thwarting the intent of Congress. Nasty IRS! They just moved back up to 1st place on my despised government agency list. Congratulations Nevada OSHA, you just dropped to 2nd place.
There is one final glimmer of hope. Congress has the opportunity to tell the IRS to go jump in a lake, so to speak. They could pass a new law that specifically states that the IRS is wrong in applying Code Section 265(a)(1) sec 1.265-1 in making expenses paid for with “tax free funds” to become non-deductible. Congress has been trying to get a second stimulus bill passed for over 6 months, which still includes this very instruction to the IRS. Let’s hope that Congress can give a “Christmas Gift” to all small businesses by passing this clarification ASAP.
Have you heard? Prov 19:6b says, “every man is a friend to one who gives gifts.”