** Updated 12/28/20 to reflect the signing of the bill into law **
On Sunday, December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 into law. The package provides government funding as well as a new round of coronavirus stimulus provisions. To the relief of many small businesses, the Act retained a provision that would allow taxpayers to deduct expenses funded with proceeds of a Paycheck Protection Program (PPP) loan that has been or will be forgiven.
The deductibility of PPP loan expenses has been an area of interest since Treasury issued Notice 2020-32 on April 30, 2020, taking the position that “no deduction is allowed … if the payment of the expenses results in forgiveness” of a PPP loan. The Treasury’s position took many taxpayers and tax professionals by surprise, since the CARES Act specifically provided that the forgiveness “shall be excluded from gross income.” While the CARES Act did not specifically address the deductibility of expense, which was the basis for the Treasury’s unfavorable position, the Consolidated Appropriations Act, 2021 overrules this position. The Act addresses this issue by modifying the taxability provision that was included in the CARES Act. The tax treatment for the forgiveness of a PPP loan now provides that:
- No amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness; and
- No deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.
Not only is new language added that allows for deductibility of expenses paid with PPP funds, but the language also clarifies that:
- Taxpayers do not have to reduce other tax attributes, for example NOL carryforwards, which is generally required under IRC Sec. 108 when a taxpayer excludes cancellation of indebtedness income;
- In the case of partnerships and S Corporations, the amount excluded from income will be treated as tax exempt income, which results in the owners receiving a basis increase for the excluded debt forgiveness income they were allocated from the partnership or S Corporation.
The bill also indicates forgiveness will be considered “tax-exempt income” for purposes of calculating accumulated adjustment account for S Corporations. While most taxpayers were focusing on deductibility, these two items mean that taxpayers will now receive a permanent tax benefit for PPP loans that have been forgiven.
The Consolidated Appropriations Act also adds provisions providing for the same tax treatment above to the second round of PPP loans added as part of the new legislation. Lastly, Section 1112(c) of the CARES Act provided that principal, interest and associated fees of a covered loan would be paid by the SBA for a six month period. The new legislation package includes the same tax treatment provisions above for any payments described in Section 1112(c) of the CARES Act. Therefore, taxpayers will not have cancellation of indebtedness income or be denied deductions for the items covered under that section of the CARES Act.
In addition to the deductibility of PPP loan expenses, the Consolidated Appropriations Act includes approximately 5,600 pages of other provisions. Stay tuned for additional updates on various other tax provisions included in the package.
Contact Robert Venables at email@example.com or a member of your service team to discuss this topic further.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.