PPP forgiveness and income

Technical topics regarding tax preparation.
#1
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Is the PPP money considered income in 2020 if my client applies for forgiveness in 2021.
 

#2
sjrcpa  
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No. It is not income. But the expenses paid with the PPP loan are not deductible in 2020.
per yesterday's Rev Rul 2020-27
 

#3
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Can those expenses that are not allowed be deducted in 2021?
 

#4
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I CONFIRM
"No. It is not income. But the expenses paid with the PPP loan are not deductible in 2020.
per yesterday's Rev Rul 2020-27"

I do not read Rev Rul 2020-27 as absolute in mandating eligible expenses not being deductible in 2020. They state the following:

"A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year."

The key for me is "Reasonably Expects to Receive Forgiveness". Wishing, hoping, wanting do not constitute a reasonable expectation. In order to reasonably expect forgiveness, I would propose at a minimum that the taxpayer would need to understand the laws on forgiveness and at least prepare the application to see if they qualify for forgiveness. As borrowers have 10 months from the expiration of their covered period to apply, how could it be said that a taxpayer has that reasonable expectation until they complete the application? There must be some calculation done in my opinion that would enable the taxpayer to have that reasonable expectation.

If by December 31, 2020, the taxpayer has not run the numbers, they would not possess the knowledge to meet the Reasonable expectation. I do not think the Ruling mandates that the expenses are not allowable in 2020 considering the "Reasonably Expects" caveat they included in the ruling. The IRS conveniently does not define "Reasonably Expects".
 

#5
sjrcpa  
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#6
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Taxnexus, this is being discussed at length at: viewtopic.php?f=8&t=19709.

The discussion is over sixty posts long but it is a thorough discussion on an important area and, I think, well worth a read.
 

#7
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I CONFIRM
sjrcpa wrote:No. It is not income. But the expenses paid with the PPP loan are not deductible in 2020.
per yesterday's Rev Rul 2020-27


Revenue Rul 2020-27 states that "if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan"

I do not interpret the Ruling as mandating the expenses as not being deductible in 2020 because the IRS qualified their ruling with the caveat of "Reasonably Expects". What does "Reasonably Expect" mean? Wishing, hoping, or wanting forgiveness certainly does not constitute a reasonable expectation of forgiveness. It would seem that a taxpayer must 1) understand the laws surrounding forgiveness and 2) Run the calculations or a draft of the forgiveness application to obtain the reasonable expectation by 12/31/20 that some or all of the loan is forgiven. If they do not have that knowledge by year-end, and there is not mandate that they must make these calculations by year-end, I see no reason while the expenses would be denied in 2020?
Is the IRS going to audit the taxpayers mind on the timing of their reasonable expectation?
 

#8
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You would not have a reasonable expectation if there were a substantial contingency.
however, why bother with rebutting the IRS reimbursement theory when you can argue reimbursment theory doesn't apply.

See Jeff's comments here:
viewtopic.php?f=8&t=19709
 

#9
sjrcpa  
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I agree reasonable expectation of forgiveness is not really defined. It suggests if you meet all the criteria for forgiveness, apply for forgiveness or expect to apply for forgiveness then you have a reasonable expectation of forgiveness.
Also, didn't everyone think it was going to be forgiven when they applied for and received the loan?

As discussed in the other thread, I've got issues with IRS' reasoning re: reimbursed expenses and tax exempt income.
 

#10
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There are places in this ruling to challenge that have far more merit than "reasonable expectation of forgiveness".

I agree with sjr...few, if any, businesses applied for these funds thinking they wouldn't have most or all of it forgiven. With 24 weeks to spend funds that should have been spent in 8 weeks, there's little reason anyone wouldn't qualify for 100% forgiveness.
~Captcook
 

#11
JR1  
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Absolutely...we expect forgiveness. What we don't expect is to effectively pay taxes on the disallowed expenses. When they declared that this would not be income, by denying the expenses, it's exactly that. So we need legislation to clear this up. IRS overstepped, I believe, from the legislative intent.
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#12
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taxnexus wrote:Can those expenses that are not allowed be deducted in 2021?


Ed Zollar's current interpretation is that if not deducted in 2020 due to reasonably expecting forgiveness, and that forgiveness does not occur in 2021 OR the taxpayer opts out of seeking forgiveness, then the expenses will be deductible in 2021. I think he cited some IRS language from the rulings but do not have time to find it and quote it--it is a safe harbor.

The IRS is going to have a loose definition of "reasonable expectation." If you spent the money per the rules of the PPPL program, you have a reasonable expectation that it will be forgiven less any EIDL Advance. It will be that plain and simple, IMO.

I am advising all PPPL recipients I work with to hold off on filing, though still have the taxes prepared under both scenarios for estimated tax purposes, until the extended due dates. I remain hopeful Congress will get off their ass and pass a bill overriding the IRS, which IMO are being cocky pricks on this subject.
 

#13
sjrcpa  
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The safe harbor is in Rev Proc 2020-51
https://www.irs.gov/pub/irs-drop/rp-20-51.pdf
 

#14
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Sure do wish they had included a safe harbor for these fiscal year ends that go ahead and file without deducting the expenses due to expecting the loan to be forgiven, and then Congress changes the law at year-end to say they are deductible. I really do not want to have to go back and amend returns for any of this!
 

#15
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JR1 wrote:IRS overstepped, I believe, from the legislative intent.


CornerstoneCPA wrote:I remain hopeful Congress will get off their ass and pass a bill overriding the IRS, which IMO are being cocky pricks on this subject.


I wonder how influential Treasury Secretary Mnuchin has been on the IRS rulemaking. The 39 year improvement property drafting error in the TCJA needing legislative relief and the PPP income/expense drafting error are examples of the IRS taking a very textualist approach whereas under different Secretaries in the past they might have looked for/found different answers. Additionally, the move away from regulations to subregulatory guidance and website Q&As has been noticeable under his tenure. I'm also remembering how Mnuchin reacted to the payroll tax executive order, and the absolute mess of W-2 reporting that we are going to be dealing with coming out of it -- he clearly didn't have any desire to deal with that EO as his stubbornness throughout the entire process was evident.
 

#16
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Seaside CPA wrote:Sure do wish they had included a safe harbor for these fiscal year ends that go ahead and file without deducting the expenses due to expecting the loan to be forgiven, and then Congress changes the law at year-end to say they are deductible. I really do not want to have to go back and amend returns for any of this!


We're holding off on actual filings as long as possible since they are extended, though for banking purposes, we are including the expenses so as to not potentially overstate net income. For me, Congress has up to about March to get their act together on this and force their intent on the Treasury.
 

#17
jon  
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Just went to the tax forum one of comments from a presenter "extensions should be filed for pass through entities and all the rest" not only for just PPPs.
 

#18
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Just had a client receive 100% forgiveness on their PPPL with no reduction for the EIDL Advance they received. Anyone else seen this with their clients? My client would have been better off having to repay the $3k of PPPL from the EIDL Advance vs. the current tax deduction loss they are facing unless Congress gets off their butts...
 

#19
Nilodop  
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The PPP Forgiveness Application Form https://www.sba.gov/sites/default/files ... -508_0.pdf in its current version (which expires today) has a section for reducing the forgiveness amount by the EIDL. Did they complete that section?
 

#20
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Yes, I saw it with my own eyes and the bank and SBA both seemed to disregard it! They simply granted 100% forgiveness of the full PPPL despite the EIDL Advance.
 


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