Deductibility of PPP-funded expenses
The bill clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.
While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).
In November, the IRS then expanded on this position by issuing Rev. Rul. 2020-27, which held that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period.
The AICPA disputed this interpretation of the CARES Act loan forgiveness rules, arguing that it was not Congress’s intent to disallow the deduction of otherwise deductible expenses. Congress has now agreed with that position.
In addition to the clarification about the deductibility of expenses paid with PPP funds, the bill clarifies that gross income does not include forgiveness of certain loans, emergency Economic Injury Disaster Loan grants, and certain loan repayment assistance, each as provided by the CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section and that tax basis and other attributes will not be reduced as a result of the exclusion of those amounts from gross income.
The bill also gives Treasury authority to waive information filing requirements for any amount excluded from income by reason of the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income, or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
I disagree with your entire statement. The law passed on 12/29/2020 made the entire PPP loan forgiven NON TAXABLE and the deductions paid with the PPP loan deductible. It also made the Employee Retention Credits available to those receiving the PPP loan as long as the wages used for the ERC were not the same wages used for the PPP loan satisfaction. The PPP loan will go in box 10 or box 11 on the K-1 for either the 1065 or the 1120/1120S. Employers now have the opportunity to go back to their 941 tax returns and claim the ERC if they have any. You need to update your education.
You would put in on page 4 line 18b. The Consolidated Appropriations Act of 2020 passed on 12/27/2020 states the PPP Loan is tax free if forgiven and the expenses paid with that loan are deductible. Just took a class on this on January 30, 2021. PPP Loan 1 and 2 are completely tax-free. General business expenses-including "Forgiveness expenses" are deductible. Not available to bankruptcy yet. The EIDL grant is tax-free also if there is proof of substantial economic injury. Employee Tax Retention Credit for 2020 required a 50% revenue decrease for a calendar quarter, the new ETRC for 2021 Q1 & Q2 requires 20% revenue decrease for a calendar quarter. Cannot use same wages as PPP loan. But if you paid employees before you received the PPP loan after the country was closed down or after the qualified period for PPP loan you can amend your 941 tax returns for 2020.
You should check with the County or grant issuer to determine if there is any change in the taxable nature of your grant. The Federal appropriations legislation does not apply to state and local governments.
My PPP loan was fully forgiven on Jan, 6 2021.
Should I claim it on 2020 tax return, or on 2021 tax return?
If I don't claim it on 2020, it should not be taxable since it will be considered as an open loan. Any opinion?
You should handle the loan forgiveness that occurred in 2021 on your 2021 tax return. Keep in mind, that any business deductions that you got in 2020 are still deductible even though the loan was forgiven in 2021. The expenses are tax deductible, and your PPP loan will not affect your 2020 taxes.
All our expenses used from the PPP loan were distribution to the partner in 2020. So if I use the distribution as expenses in 2020, the partnership will have missive losses that will be reported on form K-1 to each partner.
Something wrong here, the partners received distribution money from the PPP loan, and they are going to benefit from the losses on their K-1 due to the distribution money they received. Please explain.
The distribution expenses should be reported as a payroll cost (up to $100,000 annualized) rather than each partner individually as a self-employed individual.
HI there, working on my S-corp K1 and saw your post- just wanted to confirm that the PPP loan would go on Line 10 "bad debt" of my K1 if it has not been forgiven yet? Thanks!
I input our PPP loan in 18(b) on schedule K. I used the entire PPP loan on payroll. I am getting a loss for the year as my bottom line but I DO NOT technically have a loss due to the loan. How do I allocate it / record it on the tax forms so I no longer show a loss? Or is the loss correct? Sure doesn't seem right.
The loss is correct. The loan is non-taxable and not counted as income to your business. It only affects the partner capital account which shows on the K-1 in L as other increase. The true income also shows in L as Current year net income (loss). The loan proceeds also show on the K-1 in Box 18 Tax-exempt income and nondeductible expenses with a B code.
I have entered the amount on tax exempt 18B on schedule K1 in my Turbo Tax H& B edition and when I was done , I went and checked the 1040 and the tax exempt amount was not being taken out of the 1040 gross income . How do I adjust it on my 1040 ?
Still have questions?Make a post