2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Top Five Questions about the Paycheck Protection Program

impact my tax return? Q1

How does loan forgiveness

In an effort to assist businesses suffering from the impact of the coronavirus pandemic, the Small Business Administration (SBA) created several economic relief programs. One such program was the Paycheck Protection Program (PPP). Much has been written about this program, which provides loans designed to incentivize small businesses to keep workers on the payroll. Loans will be forgiven if certain employee retention criteria are met and the funds are used for eligible expenses. Since the loan program’s inception and its many iterations, the advisors at Marcum have addressed the concerns of our clients and the public through continuous Tax Flash updates, new content posted to our Coronavirus Resource Center, and a series of informational webinars. Several common questions concerning the PPP have surfaced through these channels. While we can advise and assist our clients in planning for some of these issues, for others we await guidance from the SBA and/or IRS. The following are the five most common questions Marcum is routinely asked and our approach to each one:

What makes the answer to this question interesting is that a PPP loan is not taxable income to the borrower, but the expenses eligible to qualify the loan for forgiveness are disallowed as deductions, unless the IRS changes its position on this matter. This means that a business will be required to reduce deductions on its tax return for expenses such as wages, employee benefits, retirement contributions, utilities, rent, and/ or interest expense. In some cases, the disallowed expenses will equal the loan forgiven; in others it might not. Presently, there is no definitive guidance from the regulators to indicate to which year the non-deductible expenses apply. Most borrowers will receive confirmation of loan forgiveness in 2021, while the applicable expenses were paid and incurred in 2020. There are also fiscal year filer concerns, as the covered period may span two filing years, and there is presently no guidance to indicate in which year or years to reduce those expenses. (A covered period is defined as the period during which the PPP funds are received and used and are eligible for forgiveness. For loans made on or after June 5, 2020, the forgiveness covered period is 24 weeks. For loans made before June 5, 2020, business owners can choose either an 8-week or 24-week loan forgiveness covered period.) For planning purposes, while we all await guidance, we recommend that clients plan as if the expenses are not deductible. This conservative approach ensures that the correct taxes will be paid if it is ultimately determined that the expenses are not deductible. Further, if there is an opportunity to defer the reduction in deductions to next year, any tax overpayments can offset next year’s balances due.