The Paycheck Protection Program (PPP) was a lifeline for many businesses which struggled over the past year because of the pandemic. There is still, however, ambiguity surrounding how to treat the PPP loan and its associated transactions on a business’s tax return.
If you’re a business that secured PPP loan funding over the past 12 months, REDW is strongly advising that you continue to wait to file your tax return until after the IRS has clarified these unanswered questions.
Background
The PPP loan program was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 to help businesses which were adversely affected by the COVID-19 pandemic and subsequent economic downturn.
Loan proceeds could be used to pay for various expenses incurred by a business, including salaries and wages, other employee benefits, rent and utilities. If the business used a certain percentage of loan proceeds towards payroll expenses, the entire amount of the loan would be forgiven.
The Dilemma
There are a significant number of unanswered questions regarding how, exactly, to report PPP loan activity on S corporation and partnership tax returns. Tax advisors and taxpayers are both continuing to wait for the IRS to provide answers to these questions.
Christina Roderick, REDW Principal and Tax Practice Leader, explained several of these unanswered questions that need clarification.
“While Congress acted on the deductibility of expenses paid with PPP funds, not all states have decided whether or not they will follow these same rules,â€
Roderick explained. “In addition, Congress did not consider the impact of shareholder or partner basis when making these expenses deductible.â€
Here are several other questions that need clarification by the IRS:
- How do you determine when is a PPP loan is officially forgiven?
- How and when (in 2020 or 2021) do you report this loan forgiveness on the tax return?
- What happens with the accrued interest that will not be paid by the business if and when the PPP loan is forgiven?
Businesses face two choices: 1.) File their tax return without clarification from the IRS and states about these unanswered questions and risk needing to amend their tax return at a later date; or 2.) Continue to wait for the IRS to provide answers to these questions before filing your tax return.
What you need to do
- Wait for guidance from the IRS and states. The IRS needs to provide clarification on these unanswered questions before your tax return can be finalized. States must also determine if they will allow the same rules as the IRS regarding how to report PPP loans.
- Stay in touch with your REDW advisor. Roderick says the IRS and states are being pressured by national accounting groups to issue this guidance as soon as possible. The hope is this guidance will be issued in early April. Your trusted advisor should let you know if any further action is needed from you.
REDW is here to help you navigate your business’s tax return with the PPP. Contact Christina Roderick for further guidance.
REDW is committed to keeping you informed at all times, and especially through the impacts of the COVID-19 pandemic. Stay connected with us on LinkedIn and @REDWLLC on Twitter. Access some of our other updates on our COVID-19 Resource Hub.
