From a Client:

Kerry, Our corp received a PPP loan for $71,200 for payroll – so I take it, if forgiven, this rule applies?

My Reply:

As you know, the rules for all of these new pandemic spurred programs are being developed on the fly, so there are constant changes and tweaks to the details.  It’s not as bad as the constant back and forth details of what does or doesn’t spread the virus that we are hit with every day, but it’s close.

What is a bit confusing in the discussions of having a "tax free" debt forgiveness is this twist.  If you are not allowed to deduct the expenses paid from the tax free PPP money, those loan proceeds are in effect being taxed by reducing your deductions and increasing your taxable income.

The tax effects of expenses paid by forgiven loan funds from the PPP program have been and are still being discussed a lot, including on tax message boards and webinars that I take part in.  The current thinking, as explained in that article you sent, is that the ages old concept of not allowing deductions for expenses which have been reimbursed will apply in order to avoid a type of double dipping.

There is some talk about Congress adding a special provision into a future stimulus bill to allow deductions for PPP paid expenses, while maintaining the tax free status of the debt forgiveness.  However, if that were to survive all the way to Trump, it would almost certainly only apply to very small businesses, after the PR fiasco of big corporations scooping up a huge portion of the PPP funds.  Depending on where they set the threshold for qualifying small businesses, there is still a good chance that yours would fall under that limit and be eligible.  With the current lack of cooperation between the political parties, I wouldn’t hold my breath for this to ever materialize.

Since the dis-allowance of deductions only applies if the loan is forgiven, that is still the best way to go if you meet the qualifications for the debt to be wiped out.  Claiming the deductions still only returns a portion of the out of pocket costs to you, while the forgiveness offsets it all.

I hope this helps.  If anything changes in this regard, I will keep you posted.  Hopefully, there will be more concrete guidance on this matter before the 9/30/20 tax filing deadline for your corp’s current tax year.

Let me know if you have any other questions or would like to discuss any of this in more depth on the phone or Zoom.

Kerry