PPP Recognized in 2020

Technical topics regarding tax preparation.
#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.
 

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