Paycheck Protection Program (PPP) Expenses NOW DEDUCTIBLE for Federal and WI
There was a lot of fuss and confusion over the past several months about whether the Paycheck Protection Program (PPP) loan expenses should be allowed on the Profit & Loss statement because the loan was forgiven, or it will be forgiven, or is anticipated as being forgiven.
How can you file a tax return if you don’t know if the loan will be forgiven, or your bank has not yet “invited” you to file an application for forgiveness by Dec. 31, 2020, or you base your “theory” on anticipating it will be forgiven? (Yes, my bank was by invitation only, and I was not invited to apply for forgiveness until PPP Round 2 was open for applications.)
The IRS and the Treasury both issued a revenue ruling and a revenue procedure basically stating that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.
In Notice 2020-32 it stated under the LAW section, “On May 2, 2020, the Department of the Treasury and the Internal Revenue Service (IRS) released Notice 2020-32, 2020-21 IRB 837 (May 18, 2020), which clarifies that no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of a covered loan.”
It further states in Revenue Ruling 2020-27 under the HOLDING section, “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.”
You can make your own tax decision on the statement shown in the above paragraph. However, some tax professionals and government officials wanted more clarity and rallied to the cause for more guidance.
On January 6, 2021 the IRS and the Treasury Department issued a notice IR-2021-04, stating they “issued guidance” today, Revenue Ruling 2021-02. The notice states “[they] are allowing deductions for the payments of eligible expenses when such payments would result (or be expected to result) in the forgiveness of a loan (covered loan) under the Paycheck Protection Program (PPP).”
That is good news…but wait. All that is forgiven Federally will all be reversed in the State of Wisconsin because it mostly conforms to an outdated version of the Internal Revenue Code (IRC).
Then on February 18, 2021, Governor Evers signed a bill (AB-2) that will conform the State to Federal tax treatment of forgiven PPP loans, among other provisions. What that means is, if it is an eligible expense on the Federal tax return, then it is treated the same on the State tax return. Now that’s great news!
The fuss and confusion are now over with. You are now free to categorize your expenses paid with PPP funds as business expenses. And, if your PPP loan has not been forgiven yet, keep it categorized as a short-term liability until it is fully or partially forgiven. The portion that is forgiven should be categorized as other income (nontaxable) and not included in gross business income.
Diversified Management can help your small business manage accurate financial records. For a free consultation or more information contact us by filling in the inquiry form or calling us directly.