In March of this year, Congress passed the CARES Act and provided funding for Paycheck Protection Program (PPP) Loans. Many of you took advantage of the provisions afforded you related to PPP and the CARES Act. As a part of that legislation, the Act made forgiveness of the loan an exclusion from taxable income. Congress intended to make the PPP funding tax-free.
After the CARES Act, the IRS issued Notice 2020-32, disallowing the expenses associated with the tax-free loan forgiveness. They are effectively negating Congress’s intent that the forgiveness is tax-free.
We anticipated that Congress would act to clarify their original intent and make the PPP tax-free, but no Congressional action has been taken as of today, October 27, 2020. This makes year-end tax planning more complicated than in previous years.
If you have not applied for PPP Forgiveness
It may be beneficial to wait to apply for forgiveness until after your taxable year-end (in many cases, after December 31, 2020). By waiting until after the end of your taxable year, you may be able to defer the income from the loan forgiveness into the 2021 tax year.
There are additional factors for consideration, including tax rates and income in 2021, as well as implications of loan covenants on your 2020 year-end. Each taxpayer’s situation will be slightly different, and it is important to consider all factors when deciding whether to wait to apply for loan forgiveness.
We are currently advising most taxpayers to wait to apply for loan forgiveness because it appears to allow more flexibility in determining which tax year to include the income or expense. There may also be an argument made that the income should never be picked up. Please consult your Smith Schafer tax advisor about the options specific to your situation.
Consider completing the application and gathering the documents needed for forgiveness, but do not apply until you have consulted with your tax professional.
If you have already applied for PPP Forgiveness
You may wish to set up a tax planning meeting to determine the implications of the taxability of the loan forgiveness. Contact your Smith Schafer professional or click the button below to schedule a meeting.