Timing of PPP expenses

A business does not receive formal forgiveness concerning a PPP loan by the SBA until the spring of 2021. The PPP loan was for $100,000. As of 12/31/2020 the $100,000 would sit on the balance sheet and tax return as a loan.

The IRS issued a notice stating that the associated expenses of payroll, rent & utilities would not be deductible even though the actual loan itself is not taxable.

Question: What year is the adjustment made for the expense not being deductible 2020 or 2021 ?

Do we take the safe route and move the loan as of 12/31/2020 off of the balance sheet and disallow the associated expenses for 2020 ?

The correct answer to the first question is we don't know. That does not mean you will not get someone to opine here.

Thanks Terry. As the year comes to end many clients are calling looking for tax planning advice and they all have the same question - What is the tax treatment for the PPP loan and the associated expenses ?

I'm preparing two plans.
Absent clear guidance and/or legislative change, I'm preparing folks to pay tax as though the tax effect is in 2020 and extend their return until we have a position on which to stand. If the tax effect falls in 2021, we'll likely roll the overpayment.
That's just my tentative plan, but Terry's 100% spot on...there is no clear answer at the moment.

See viewtopic.php?f=8&t=19640

Assuming you are cash basis taxpayer:

2020:

DR Cash $100,000
CR PPP Payable $100,000

DR Salaries $100,000
CR Cash $100,000

2021 when loan is forgiven:

DR PPP Payable $100,000
CR Salaries $100,000

DR PPP Payable $100,000
CR Salaries $100,000

or, to be transparent

dr PPP Payable 100,000
cr Income from discharge of PPP Payable 100,000
To record excludible income

dr Salaries paid from discharge income 100,000
cr Salaries 100,000
Memo entry to record alleged non-deductible expenses paid from excludible income

So we know for a fact that PPP forgiveness will have an affect on salaries for QBI calculation???

When Biden becomes President the QBI will be eliminated in 2021

Biden's tax plan says that he will keep the QBI for those under $400k but we shall see. However, he will not take office until January 2021 and there is no way he will push through a tax plan in year 1, especially if the senate is still controlled by Republicans.

I'd look for higher taxes in 2022.

Maybe but the Govt is short of revenue so we might see some big Biden tax increases across the board for 2021.

Agree that we don't know anything for sure at this point.

I listened in on an AICPA roundtable discussion yesterday. It basically said that the Treasury is saying if there is expectation of forgiveness of the loan, then expenses should not be deducted. However, they went on to say that, instead, some firms are taking the stance that the expenses are deductible now based on the Bliss Dairy court case. Haven't had time to look at that case in detail yet. Just wanted to put it out there for others that may want to look at it.

The purpose of the PPP loan was to help small businesses that were in financial need. I understand the Treasury's position concerning the expenses but what is the purpose of having businesses pay tax on a loan that was meant to help them.
In addition since the cases and deaths due to Covid-19 is again on the rise we might need a 2nd round of PPP.

...but what is the purpose of having businesses pay tax on a loan that was meant to help them.

To this point, there's not one business out there that is worse off because they received the loan...even with the tax effect.
I agree that this dynamic is not what the program was "sold" to be, but don't pump your clients full of "victim" status because they got these monies.

agreed. But why talk about a second PPP when you are taxing the first one !

Biden's plan eliminates any QBI deduction if taxable income is over $1,000,000. IF HIS PLAN GETS THROUGH WITHOUT A CHANGE. It will probably take years to get it done.????

The PPP certainly turned into a money grab as probably the majority of recipients did not need it and would still be better off with the loan even if the expenses were not deductible.

But remember this was offered in early April, nobody knew how bad this was going to be and there was talk that it would be over by Easter (Trump wishful thinking at the time). But the loan was given to keep your employees on the payroll to cover what was expected to be short shutdown. The thought was better to keep people employed rather than collecting unemployment.

So what about that business that borrowed the funds, kept the employees on the payroll but come July and August with no relief in site, had to go out of business. You are going to tell them now you owe us tax on those funds. They would have been better off laying everyone off in the beginning.

good point Berkshire. I have a few clients with that same situation. Laying off the employees in the beginning would have been the better decision.

Come on. My clients understand this, and they're not even experienced tax professionals. CaptCook is right.

If you get PPP loans and you use that to pay salaries to yourself and your employees leading to its forgiveness, and your business continues into 2021, that forgiven loan means that you had better cash flow than you would have absent the program. Having that additional cash and having the same amount of additional taxable income should not be considered any higher burden than if the business grew and increased its profits by the same amount.

For those businesses who took the PPP who would have otherwise shut down their business, to say that they pay taxes on it and would be "better off" not doing it is absolutely preposterous. When you use the PPP to pay wages that would otherwise not have been paid, there's no ascension of wealth -- the forgiven loan proceeds are nontaxable and you pay out equal amounts to employees that are nondeductible, so no net tax. Which is nothing to say of the huge benefit those businesses got out of additional time in a period of massive uncertainty.

Is the PPP perfect? Absolutely not. Was the tax issue a drafting error? Probably. If we had the benefit of hindsight would we have done things differently? 100%. But to see tax professionals in this and other threads screaming bloody murder because businesses with ascensions of wealth having to pay tax on them just boggles the mind.

Ascension of wealth and accession to wealth have different meanings. But that's picky of me. We all know what you meant to say.

But much less picky of me is the fact that we (tax pros) are, by nature and by training and to a large extent by obligation, picky in interpreting tax law. Pretty much duty-bound to do so by presenting our advice to clients and having them make informed decisions.

And for some picky analysis of the issue, see viewtopic.php?f=8&t=17725&hilit=265 and viewtopic.php?f=8&t=19640 and others.