PPP Alert: New IRS Ruling Could Mean A Significant Tax Liability for PMPs in 2020

For those who have been following the information we have been disseminating on the Paycheck Protection Program (PPP) prior to Nov. 18, here is what we knew:

1. The PPP loan itself is not taxable, even after forgiveness;
2. Any eligible expenses that were used to meet the criteria for forgiveness are not deductible as a result of them being used to produce nontaxable income (i.e., payroll costs, mortgage interest, rent, utilities); and
3. Since the PPP loan amount to be forgiven is not taxable income and the expenses used to achieve forgiveness are not deductible, by reason of causation, the amount to be forgiven is essentially taxable.

Here is what we didn’t know:

1. Since the PPP funds are a loan until they are forgiven, when is the taxable income recognized?
   a. In the year the funds were received (2020)?
   b. Or in the year of forgiveness (perhaps 2020 or 2021, depending on when applied for and accepted)?
2. While no one wanted to pay taxes on the funds, one of the hallmarks of proper tax planning (assuming tax rates are not going up with the new administration) is to defer income and accelerate expenses. So, many of our friends and clients were planning to go for the forgiveness in 2021 and recognize the additional income in 2021. Sounds like a good plan.

However, along comes Nov. 18, 2020, and the IRS issues Revenue Ruling 2020-27, which addresses when a borrower under PPP should exclude the expenses as deductions in determining taxable income if used to obtain forgiveness of their PPP loan. In short, for a calendar year taxpayer, the expenses are nondeductible for year-end 2020 if there is a “reasonable expectation of forgiveness,” regardless of whether the borrower files a forgiveness application in 2020 or 2021 and regardless of when the actual forgiveness event occurs. Essentially, it is taxable in 2020.

It should be noted that members of Congress disagree with the conclusion that costs are nondeductible; yet to date, the Treasury Department has not reversed its decision.

While there are several issues still unclear on the mechanics of how it will all work, at this point, we are advising our clients and friends to comply with the Revenue Ruling and include the forgivable portion in their tax projection for 2020. For most pest management professionals, the forgivable portion is the entire amount received under PPP. We are also advising that folks do their projections ASAP because there may be a large and unexpected tax liability.

Please get in touch with us at PCO Bookkeepers if you need guidance.

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