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.