The year end is fast approaching which means it's time to think about the impact of the PPP loans / forgiveness on business taxes.
The IRS has stated previously that the cash received from a forgiven PPP loan is NOT taxable income. However, any expenses that were paid with these PPP funds are NOT deductible business expenses. So there is no tax benefit.
This is where it gets tricky - businesses used the PPP funds to pay for business expenses in 2020 and most loans will not be forgiven until 2021. So there is no PPP nontaxable income to offset these nondeductible expenses.
The IRS issued Revenue Ruling 2020-27 in November that states:
PPP recipients may NOT deduct expenses paid with PPP funds in 2020 if the taxpayer reasonably expects to receive loan forgiveness. For you tax code people - the ruling is based on IRS Sec 265.
Even if you don't file for forgiveness until 2021, if you knew your PPP expenses and had a reasonable expectation of reimbursement you may NOT deduct any PPP related business expenses in 2020.
There is a "Safe Harbor" provision for a taxpayer to later deduct expenses paid with PPP funds but is later denied or does not apply for forgiveness. (Rev Procedure 2020-51.)
Congress has stated that this ruling goes against the intent of the PPP. However, legislation will need to be passed to change this ruling. There is currently no pending legislation being considered. There is also expected to be legal challenges to this ruling based on other IRS rulings in the past.
What does all this mean? You should stay in touch with your tax advisor to determine the best course of action for your situation and keep updated on any legal or legislative changes. There are many moving parts based on what expenses you used for PPP (payroll, rent, other), when you filed for forgiveness, and how you file your taxes.