Charles Read, CPA, USTCP, IRSAC
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The IRS in a release dated April 30 changed the Payroll Protection Program landscape. Relying on established law and regulations the IRS basically eliminated the concept that the PPP loan is a forgivable loan and has no tax impact. Relying on Code Section 265 (a) (1) of the IRS Code there will be no deduction allowed for any amount that is allocable to income that is exempt from taxes. Therefore the otherwise deductible expenses that a company uses the PPP money for are no longer a tax-deductible item.
This means that in effect the PPP forgivable loan usage lowers your tax delectable expenses by the amount of the loan forgiven. So the net effect is to make the PPP loan taxable income by reducing deductions by the amount forgiven.
Congress gives and the IRS takes. I fully understand the law and it is of long-standing. I do not believe that that is what Congress intended. But Congress did not specify that the PPP forgiveness was not subject to existing tax law. If that is what they intended, it to be not taxable, they should have written it into the law. Unintended consequences!
Congress can fix this if they choose to. It is solely up to them. They established Code Section 265(a)(1) and they can provide exceptions to it. They have not at this point. So the idea that the PPP was a way to boost the small business community has been shot in the foot. This won’t affect your taxes until the next filing season but everyone needs to be aware of the IRS position and law. Standby to see is Congress intervenes to exert their will, or not.
Here is the link to the release https://www.irs.gov/pub/irs-drop/n-20-32.pdf if you are interested in the legalese.