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PPP Recognized in 2020

Technical topics regarding tax preparation.
#1
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I see the many topics re: getting funds out to S Corp shareholders (draw, dividends, wages), and problems with fiscal years.

For your typical small S corp with a calendar year, are most of you just reporting the PPP funds as additional income rather than trying to back out payroll and other allowed expenses?

and

We are recognizing the funds in 2020, assuming forgiveness, so we don't have to amend corp returns as well as the shareholders returns too?

Thanks
 

#2
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I think most CPA's planning on delaying the forgiveness until 2021. And I plan on filing all fiscal year returns with the PPP loan still on the book as a loan and deducting 100% of wages, rent and utilities on the fiscal year returns filed.
 

#3
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Berkshire, what happens in 2021 when the PPP loan is forgiven? How will you treat the 2020 expenses if they continue to be non deductible?
 

#4
Noobie  
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I plan on getting forgiveness for as many clients as possible in 2020. That way, at least we know what the tax rates are. And it also follows the matching principle.
 

#5
sjrcpa  
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You think it will happen in 2020?
My first client to apply for forgiveness got notice today from the lender that his application was approved. He will receive electronic documents to sign "within a few weeks". The lender then helpfully pointed out that SBA has 90 days from the date the lender submits the executed paperwork to make their decision and provide their paperwork.
 

#6
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My thinking is if the loan is not forgiven when they file the tax return, you would show the PPP as a loan and deduct all expenses. If the loan is forgiven after the tax return has been filed, hopefully you would just bring it into income the following year.

I have one that received PPP loan in April, and has a 5-31 year-end. I extended tax return, but trying to decide exactly what to do. I'm thinking if loan is forgiven, then only the applicable expenses paid from April to end of May (about 1/2 of loan) are non deductible, and the other half would be non-deductible in the next fiscal year. That way the taxes would essentially be spread over two years.
 

#7
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I am 99.9% certain that the expenses are going to be deductible. If somehow congress does not allow the deductions then I will either have to amend the fiscal year returns or adjust the FY 2021 expenses. The Chairmen of the Ways and Means is our congressman (Richard Neal) and he has said repeatedly that congress will correct this. It will be addressed but like anything congress does it will probably be last second, like the tax extenders always are.

I can not see filing a fiscal year return with the expenses non deductible when everyone seems to agree that congress will address this issue.
 

#8
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I am leaning toward 2020 recognition for a number of clients. Most folks also had lower income. So, recognizing the tax effect in 2020 keeps a certain level of consistency instead of ending up with a spike in 2021.
That said, this is very much a facts and circumstances determination working closely with the client to make a call...absent clear guidance.

I, too, believe a legislative fix will happen, but if it doesn't I'm hopeful IRS will provide clear guidance.
~Captcook
 

#9
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I think I'd rather recognize it in 2020 and amend only3 of 100 returns, rather than have to amend 97 returns (and 700 individual returns) after the PPP's are forgiven. Also "if" congress allows the deduction I can't see it happening before lots of returns are already filed.

I also agree with Noobie on "Matching"
 

#10
dave829  
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Seaside CPA wrote:If the loan is forgiven after the tax return has been filed, hopefully you would just bring it into income the following year.

How do you justify reporting the forgiveness as income when section 1106(i) of the CARES Act says that it’s not taxable:

(i) TAXABILITY.---For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.
 

#11
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Taxable or non taxable, it still is brought into income instead of being shown as a loan.
 

#12
Noobie  
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dave829 wrote:
Seaside CPA wrote:If the loan is forgiven after the tax return has been filed, hopefully you would just bring it into income the following year.

How do you justify reporting the forgiveness as income when section 1106(i) of the CARES Act says that it’s not taxable:

(i) TAXABILITY.---For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.


It is not taxable, but the expenses used to forgive it are expenses allocated to non-taxable income, therefore, non-deductible.... As the IRS has repeatedly said.
 

#13
gusser  
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dave829 wrote:
Seaside CPA wrote:If the loan is forgiven after the tax return has been filed, hopefully you would just bring it into income the following year.

How do you justify reporting the forgiveness as income when section 1106(i) of the CARES Act says that it’s not taxable:

(i) TAXABILITY.---For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.


I am trying to look at this from a logical standpoint. If you have up to 5 years (maturity date of the loan) to ask for forgiveness and do it a few years from now, you certainly wouldn't try to amend a closed year to reduce expenses. It doesn't make sense. I've been sitting on several May & June (and soon to be Sept) corporate returns not knowing which way to go. I need my fees and don't want to be preparing FYE returns during the filing time crunch. Also, you may not get the forgiveness you think, may not get any at all or you may decide not to ask for forgiveness. Well known tax speaker David Mellum says "if you have a June year end and at the end of the FYE you owe the PPP loan, it's just a loan on the books and should be handled that way because at that point in time there was no forgiveness issues". Dave829 do you agree with his thinking?
 

#14
jon  
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Really - I do not think anyone(very few) is going to get formal response on the forgiveness in 2020.
 

#15
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I think I agree that very few people are going to see forgiveness in 2020. My bank keeps telling me I have to wait to submit my request for forgiveness until they open their portal at which time I will receive an e-mail directing me to apply. It's really frustrating because I would actually like to start the process. Once filed, from what I've read, the full process, start to finish, takes a couple of months. So not likely to be completed by year end.
 

#16
Noobie  
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If you have an expectation for the loan to be forgiven, and loan is forgiven before you file the tax return, then I believe you should include it on the 2019 return.
 

#17
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I liken this in some ways to insurance proceeds. You can't take a loss when that loss is insured and you expect reimbursement. I understand the premise is different, but the economics are largely the same.
~Captcook
 

#18
dave829  
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gusser wrote:Well known tax speaker David Mellum says "if you have a June year end and at the end of the FYE you owe the PPP loan, it's just a loan on the books and should be handled that way because at that point in time there was no forgiveness issues". Dave829 do you agree with his thinking?

I agree that if there is no forgiveness at year-end, then the loan is reflected as a loan on the books. But that wasn't my point. My point was that you cannot just choose to report the forgiveness of the loan as income when a federal statute specifically excludes it from income.
 

#19
Nilodop  
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My point was that you cannot just choose to report the forgiveness of the loan as income when a federal statute specifically excludes it from income.. Also, when there has not been a forgiveness, what allows reporting forgiveness income?
 

#20
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Whether we each individually report it as negative expenses, or as income, the net result on the P&L is going to be the same, and I can't see IRS arguing about that as long as it's reported (I haven't looked at 199A wage ramifications).

With the large number of these loans issued I'd expect guidance sooner than filing season. I have clients with upwards of 1/2 million of these loans and the shareholders are trying to get personal estimated payment numbers. Some have lots of cash in checking accounts they want out in bonuses, for deductions to reduce K-1 income, but they need to run payroll before year end.

At this point I think I'm reporting all wage costs, for 199A, and recognizing in 2020 for everyone who received and spent the funds in 2020, and hoping that this way causes me to "amend the fewest number of returns".

And hope for guidance !
 

#21
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So you are accelerating income into the current year and have your clients pay income tax on it when just about everyone agrees that congress will address the issue at some point. I can understand the thinking of people who say they are taking full deductions on fiscal year filers and pushing the loan into the next year but I do not understand why so many are eager to pick up income in 2020.

WSJ said a couple of days ago that banks have 60 days to submit the application once they receive it and then the SBA has 90 days to process. That is 150 days for turnaround. Banker mentioned in the article that the applicant submitted 2,000 sheets of documentation.

My predictions is banks become overwhelmed, SBA becomes overwhelmed and at some point Congress automatically forgives all loans under $2 million and clarifies all expenses are fully deductible.
 

#22
jon  
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I believe portals are open - banks have decided what ones to process. I do not believe that paper work by banks and SBA are going to be fast!! I like the idea of waiting to see when forgiveness happens in 2021 and pushing it back. I will hope for that.

There seems to be a second round of these that will happen in 2021 do we want two forgiven in 2021 (or push to 2022)???
 

#23
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BerkshireCPA wrote:just about everyone agrees that congress will address the issue at some point.


Just about everyone agrees? Really?

Also, what is your definition of "at some point" and how does that match up against the upcoming due dates?

CaptCook wrote:I liken this in some ways to insurance proceeds. You can't take a loss when that loss is insured and you expect reimbursement. I understand the premise is different, but the economics are largely the same.


That's a really interesting analogy.
 

#24
Wiles  
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I agree with CaptCook's analogy. The IRS has told us that covered expenses are not deductible to the extent those expenses result in forgiveness. If you are not going to make those expenses non-deductible, then your tax return is currently incorrect. We all should be filing extensions until the skinny HEROES Act passes.
Last edited by Wiles on 26-Oct-2020 2:05pm, edited 1 time in total.
 

#25
sjrcpa  
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Wiles wrote:covered expenses are not deductible to the extent those expenses result in forgiveness

Yes, but right now we don't know if there will be forgiveness. We may not know in March when partnership and S Corp returns are filed if there will be forgiveness.
 

#26
Wiles  
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Because there might be an alien invasion? ;)
 

#27
sjrcpa  
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Because who knows how the process will work. I have had 1 client submit a forgiveness application so far. There were notified a few days ago by the lender that it was approved. Now it has to go to SBA. Are they going to rubber stamp it? I have no idea.
I have a number of clients whose loans are over $2 million and they are going to be audited. How will that work?
I'm not counting my chickens before they hatch.
 

#28
Nilodop  
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In #19, I asked
Also, when there has not been a forgiveness, what allows reporting forgiveness income?.
It was a sincere question. Generally we can't just choose a year when income is reportable. Has anyone researched whether there is authority to report it before it is forgiven, based on the high degree of likelihood that it will be, but not a certainty.

Some might ask why would IRS dispute early reporting of income. That's a whole different question.
 

#29
Wiles  
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There is no forgiveness income to be reported at all.
 

#30
Nilodop  
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Well, suppose SBA announces that it will eliminate the need to provide further documentation for loans of, say, $150k and under, but that they will require some sort of affirmation under penalty of perjury. And let's say the taxpayer has not provided the required affirmation as of the end of the tax year, so technically the loan has not been forgiven. Then after year-end, he sends in the affirmation but as of the return filing date it has not been acknowledged. Or maybe it has as of the filing date but not as of year-end. When is the forgiveness considered excludable income for tax purposes? Isn't there a principle that some mere menial ministerial or administrative tasks can be disregarded in making substantive tax decisions. someting along the lines of substantial compliance?
Last edited by Nilodop on 27-Oct-2020 7:54pm, edited 1 time in total.
 

#31
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When is the forgiveness considered excludable income for tax purposes?


The PPP loan forgiveness is treated as extinguishment of debt under ASC 405-20 once the SBA has approved the forgiveness as this is when the loan holder is legally released from being the prime obligor under the liability (ASC 405-20-301).
Example, $80,000 is approved for forgivenes by SBA, the loan would be reclassified as income at that time:
Current PPP loan $80,000
Other income- Loan forgiveness $80,000
The tax teatment for the PPP loan forgiveness is non-taxable and would be relfected on Schedule M-1 or M-3 as permanent non taxable income.
 

#32
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Taxmaster, I agree with what you are saying. However, what I am not sure of is if I have a calendar year-end client and they receive forgiveness from the SBA on 2-15-21, how is it shown on the 12-31-20 tax return? It was not forgiven as of the end of 2020, so is it shown as non taxable income on the 2020 return or the 2021 tax return?
 

#33
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TAXMASTER wrote:
When is the forgiveness considered excludable income for tax purposes?


The PPP loan forgiveness is treated as extinguishment of debt under ASC 405-20 once the SBA has approved the forgiveness as this is when the loan holder is legally released from being the prime obligor under the liability (ASC 405-20-301).


First of all, as many have pointed out above, it is not income when forgiven. The forgiveness has an income effect, but, again, it isn't income. The question is whether we can deduct the related expenses.

Secondly, what you've noted above is an accounting standard, not the proper tax treatment. There are numerous differences between the proper financial accounting for an item and the proper income tax treatment of that same item. I don't find the financial accounting treatment compelling in this instance.

Coming back to my first point, unless there is an act of Congress, the taxpayer will be making an application to have the debt forgiven. This application will specifically identify expenses paid out in 2020 as the basis for the forgiveness of the debt. If there is little to no doubt that the loan will be forgiven, then I feel there is a weak argument NOT to reduce the identified expenses on the 2020 tax return. For non-calendar year end taxpayers, a reasonable proration between years seems appropriate. The concept here is like an insurable loss. If you choose not to use insurance proceeds to replace the property to which the proceeds relate, the rules direct you to go back and amend those returns. So, do you want to be amending returns? I don't. Further, most folks are going to have down years in 2020 (i.e. lower tax rates). Wouldn't it be wiser to subject this income effect to lower tax rates?
Finally, in the absence of clear direction from IRS or other sufficient guidance, I will be extending returns and putting together projections including the income effect for extension payments. If they happen not to change any rules, my clients will be on solid ground. If they do, they'll end up with a decent refund.
~Captcook
 

#34
gusser  
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CaptCook wrote:
TAXMASTER wrote:
When is the forgiveness considered excludable income for tax purposes?


The PPP loan forgiveness is treated as extinguishment of debt under ASC 405-20 once the SBA has approved the forgiveness as this is when the loan holder is legally released from being the prime obligor under the liability (ASC 405-20-301).


I know logic doesn't mix well with taxes but I would think the negative expense should occur in the year the loan is forgiven. This is my simple example of why:

You have up to the maturity date of your loan to ask forgiveness. Let's say the loan is 5 years. In year 4 you apply for and get forgiveness. Do you possibly think theirs will require us to amend a tax return that is out of statute to reduce the expenses? I don't think so, that's what I'm trying to hang my hat on. It's logical. Also, you may only ask for partial forgiveness or the SBA may deny it altogether. Sure seems like an expense reduction in the year it has been ascertained that the forgiveness finally occurs.
 

#35
Wiles  
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Expanding on this, the taxpayer can also implement strategies that avoid or reduce those nondeductible expenses in the year of forgiveness. For example, closing their business before applying for forgiveness or eliminating (or drastically reducing) their payroll expenses in that year.

;)
 

#36
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The obvious problem we are confronted with here is the same one that we’ve beaten to death in other, older threads: The application of Sec 265 to the PPP, and specifically, the timing issue that it presents.

While Gusser’s argument might be logical, that doesn’t mean Captain’s argument is illogical. Far from it. Captain’s argument ties the loan proceeds to those specific expenses that were “paid for” with the loan proceeds. His argument simply involves a “relation back” type of concept. It is not a concept that you normally see in the COD area, but it really is the only concept that makes Sec 265 workable from a technical standpoint. And we are told, by the IRS, that Sec 265 applies. In doing so, the IRS cited a bunch of material, none of which really aligns with the timing nuance produced by the PPP situation. So, we wonder if Sec 265 really, really does apply, despite what the IRS has told us via its flimsy support.

Unpacking all of this is difficult. In evaluating the issue, and deciding upon which year to reduce our expenses, we are basically trying to figure out what a judge would decide (and perhaps more than one judge). And that’s where the human element comes in, no matter how well-reasoned the arguments are on both side. But that’s what judges are for: to preside over controversies.

Can you see a judge saying, “The expenses in question, which were listed on the forgiveness application, were paid in 2019. Those expenses get reduced upon future forgiveness, even if that forgiveness happens in a subsequent tax year. I realize the expenses, when paid, were not paid with tax-exempt income. Far from it, they were paid with monies flowing a Loan (liability). But so what. I hereby create a ‘relation back’ concept in the COD area and I’m invoking it herein. Even though those expenses were initially paid with borrowed funds, as it turned out, they were paid with tax-exempt funds.”

Yeah, I can see a judge saying that. But then I can see the taxpayer wanting to appeal the decision: That this is not how it works with forgiven loans and COD income. We don’t go back in time to recast lent proceeds as tax-exempt income, so as to now tie expenses paid with those proceeds to a form of tax-exempt income. The annual accounting concept would be violated.

Then we wonder how that appeal would go.

And then we wonder about the different circuits, and if we might get different results in them. And now we have a split of authority. So we then wonder where we go from here.

And then we wonder if the IRS is even right in the first place, that expenses really do get reduced under Sec 265.

Have fun.
 

#37
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Here is a short piece by tax attorneys who say Sec 265 does not apply. This article is pretty easy to read. I am no expert on 265 or 108, but they seem confident.

https://www.castroandco.com/blog/2020/m ... are-deduc/

Apoligize if it has been posted before
 

#38
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Smith's Canon of Equity dictates that forgiven loans should be taxable, especially as EIDL grant recipients must pay tax on that income. Smith's Canon of Certainty also dictates that it cannot be taxable unless and until it is forgiven.

The observant will note that my definition of Equity is more expansive than that given in modern texts.
 

#39
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We were "promised" it would be forgiven before we ever applied for it (assuming funds spend as dictated), otherwise the majority never would have applied for, or accepted the funds. Intent ?
 

#40
EADave  
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BerkshireCPA wrote:Here is a short piece by tax attorneys who say Sec 265 does not apply. This article is pretty easy to read. I am no expert on 265 or 108, but they seem confident.

https://www.castroandco.com/blog/2020/m ... are-deduc/

Apoligize if it has been posted before


Berk, you beat me to it. I was just about to post this tonight, and I am interested to see opinions on this article. I really wish we had some solid legislation in place (besides the IRS Notice) to answer this question.

What I am doing is treating the PPP Loans as income, currently, and telling business owners to plan as such for now, until we hear differently. Technically the Loan isn't income; I know, but this seems to be a valid shortcut for now. Reduction of expense, increase in income, tomatoes/tom-ah-toes.
 

#41
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Does Section 111 have any part to play in this? I would so no because there's no "recovery"?
 


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