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FY2019 w/ PPP Activity

Technical topics regarding tax preparation.
#1
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I am doing a C-Corp tax return with a FY ending 6/30/2020, which includes PPP expenses. Currently, we know the regulations (including NC, the state I have to prepare/file in) indicate any expenses paid with forgiven PPP proceeds are not eligible for deduction. NC's bill, H1080, goes further to say that if any expenses are deducted at Federal level for forgiven funds, they have to be added back at state level.

Forgiveness has not occurred because the application process has not opened up with this client's bank. The client needs the tax return, though, for obtaining a loan to acquire the assets of a similar business.

I proposed two courses of action: 1) take conservative approach and assume all PPP funds spent through close of the FY will be forgiven, and add them back or 2) be aggressive based on believing Congress will pass a law that allows the expenses to follow the original "intent" of the program, which is to not be taxable income AND to be deductible. Then, depending on what ultimately becomes the law, either amend or do an adjustment on a subsequent year as allowed by the tax regs.

My client asked if I could prepare a draft copy under the conservative approach that he could then provide to his bank. IF I do this, I feel it is better to put "DRAFT - NOT FILED" as a watermark to make it very clear it is not a filed or final return. I have never released a copy to a client that would not be the final version, unless they happened to catch something I overlooked, let alone when I knew it was going to a third party for lending purposes. The return would show greater income by adding back PPP expenses, but that is what worries me--it could be artificially inflating net income vs. my favored "aggressive" approach (which falls in line with what Bradley Burnett suggests, too).

What would you do about releasing a draft copy of tax return, knowing it will go to lender? Which approach would you take concerning PPP expenses given no forgiveness has occurred? Surely I cannot be the only CPA dealing with tax returns that already have PPP related expenses...
 

#2
Nilodop  
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The expenses were incurred. Adding them back affects taxable income, not book/real/economic income. Are bankers that unsophisticated to not know the difference? Do they, for instance, understand that taking 100% depreciation when allowed under the law does not mean the depreciation "really" happened in the purchase year?

To me the bigger question is supplying a draft return at all.
 

#3
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Forgiveness has not occurred because the application process has not opened up with this client's bank.

Until the loan is actually forgiven( taxpayer files forgiveness application, bank submits to SBA max 30 days, bank receives acceptance from SBA max 90 days and notifies customer a process that could take max 150 days), the expenses are deductible.

Then, depending on what ultimately becomes the law, either amend or do an adjustment on a subsequent year as allowed by the tax regs
.
Agree, If take expenses now and later loan foregiven then can report as income( tax benefit rule) on next years tax return. In the meantime ( time between tax return filings) hopefully Congress will fix.

Which approach would you take concerning PPP expenses given no forgiveness has occurred?


Either the loan has been forgiven when must file or it has not.
 

#4
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I'm dealing with the same thing right now, only a 5-31-20 fiscal year-end. Plus, I prepare financials for this client so that they can get a very large operating line-of-credit at their bank. I'm thinking of going ahead and completing the return, as I don't think they will actually get their PPP loan forgiven by the due date of the tax return.

My thought process is the loan will be shown as such on the tax return: as a loan and not income. Accordingly, all of the expenses would be deductible on the tax return.
 

#5
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When you mark the return draft it's not expected to be anything except an approximation or how you expect to file currently. New information can always come out later. However, with knowing you have such a material issue that could go one way or the other I would mark it draft and insert a first page in front of the return that has a note saying because of the uncertainty of teh PPP expenses the return is expected to be prepare one of two ways, etc, if the draft return is not the proper treatment when the uncertainty is resolved we expect the taxable income to be $xxxx instead of $XXX.

I dont know if my advice is right or wrong, but it's making a representation to lender and I would cover my bases.
 

#6
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Nilodop wrote:The expenses were incurred. Adding them back affects taxable income, not book/real/economic income. Are bankers that unsophisticated to not know the difference? Do they, for instance, understand that taking 100% depreciation when allowed under the law does not mean the depreciation "really" happened in the purchase year?

To me the bigger question is supplying a draft return at all.


Agreed, but I do not have a positive experience with bankers, overall. We are in two different rules and yes, many truly do not understand even the simplest of concepts to reconcile book vs. tax. I also hate releasing a draft return given uncertainty, because the extended due date is 4/15/21 and I sure as hell hope PPP can be wrapped up by then, which could trigger amending. This is why I prefer my more aggressive approach since it actually shows LOWER taxable income, and also reflects the reality that nothing has been forgiven.

Seaside CPA wrote:
My thought process is the loan will be shown as such on the tax return: as a loan and not income. Accordingly, all of the expenses would be deductible on the tax return.


This is how it is shown under my "aggressive" approach. Given Bradley Burnett favors this approach, as well, along with other well respected "experts," I lean toward this current treatment.

Terry Oraha wrote:When you mark the return draft it's not expected to be anything except an approximation or how you expect to file currently. New information can always come out later. However, with knowing you have such a material issue that could go one way or the other I would mark it draft and insert a first page in front of the return that has a note saying because of the uncertainty of teh PPP expenses the return is expected to be prepare one of two ways, etc, if the draft return is not the proper treatment when the uncertainty is resolved we expect the taxable income to be $xxxx instead of $XXX.

I dont know if my advice is right or wrong, but it's making a representation to lender and I would cover my bases.


I could, but I do not like to knowingly provide that type of information to third parties. If anything, I would prefer to take my aggressive stance and then insert language on an inserted page that, depending on how the IRS and Congress settle PPP matters, taxable income could increase by $x for FY2019 with a resulting tax liability of $z. But I do not trust bankers and feel the less information I can legally give them, the better protected I am.

I think at this time I am going to suggest to my client the aggressive stance be taken since no forgiveness has occurred as of this time, we do not know what is going to occur between Congress and IRS (and the bank does not really care about the NC return, but again, no forgiveness as of yet), etc. Since I do not trust bankers, I am not satisfied with "DRAFT" as the watermark--I would want it to be "DRAFT - NOT FINAL" or "DRAFT - NOT FILED."
 

#7
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Nilodop wrote:Are bankers that unsophisticated to not know the difference?


Yes, yes, a million times yes.

CornerstoneCPA wrote:I could, but I do not like to knowingly provide that type of information to third parties. If anything, I would prefer to take my aggressive stance and then insert language on an inserted page that, depending on how the IRS and Congress settle PPP matters, taxable income could increase by $x for FY2019 with a resulting tax liability of $z. But I do not trust bankers and feel the less information I can legally give them, the better protected I am.

I think at this time I am going to suggest to my client the aggressive stance be taken since no forgiveness has occurred as of this time, we do not know what is going to occur between Congress and IRS (and the bank does not really care about the NC return, but again, no forgiveness as of yet), etc. Since I do not trust bankers, I am not satisfied with "DRAFT" as the watermark--I would want it to be "DRAFT - NOT FINAL" or "DRAFT - NOT FILED."


I think we're in an atmosphere where we need to consider doing things we might not under other circumstances. Last year I wouldn't think of giving a draft tax return to a bank but these days... yeah. You are probably right that the less information you give, the better protected you are. I would stress that anyone wanting to present a draft return to a bank for loan purposes where there is uncertainty in the tax positions, the return should be prepared with the position that shows the lowest income.
 

#8
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I have never been asked to prepare a draft tax return. If I were going to, I would only prepare it based on what the current situation/law is. My "what if" scenarios would be based on laws being changed or loans being forgiven prior to actual tax return filing.
 

#9
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I decided I am going to offer up a government copy (less detail) with the watermark. I am going to reprint it as yet another PDF after the watermark has been applied to make it even more difficult to remove it. While I trust my client, I do not trust banks which is why I also made it clear to my client I am only willing to do this under the approach that shows the least income, which happens to be the "aggressive" approach. Plus,language that the return is NOT final or filed. They seem OK with it, so first time ever doing this. I agree with missingdonut that current circumstances warrant us doing something we otherwise would not even consider.
 


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