On December 20, 2020, Congress approved the Emergency COVID Relief Act of 2020 (the Act), which provides another round of stimulus funding as well as a long-awaited update regarding full deductibility of expenses covered by PPP loans and guidance regarding the related impact to tax basis for owners of flow-through entities.
PPP Loan Forgiveness and Expense Deduction Background
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and subsequent guidance provided from the IRS in Notice 2020-32 and Revenue Ruling 2020-27 previously indicated that PPP loan forgiveness would not result in taxable income but also indicated that expenses reimbursed with PPP loan funds would not be deductible for tax purposes.
As a result, taxpayers were faced with expense reductions that would produce similar increases to taxable income and the related tax burden.
This treatment is reversed by the Emergency COVID Relief Act of 2020 (the Act).
Emergency COVID Relief Act of 2020 Guidance For PPP Loan Forgiveness and Expense Deductibility
Section 278(a)(1) of the Emergency COVID Relief Act of 2020 (the Act) states the following:
“no amount shall be included in the gross income of a borrower by reason of forgiveness of indebtedness described in…the CARES Act,”
This confirms the previous guidance provided under the CARES Act, but Section 278(a)(2) of the Act goes on to state:
“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 provided by reason of forgiveness of indebtedness described in…the CARES Act.”
Finally, taxpayers can not only have PPP loans forgiven without consequences to taxable income but can also deduct the related expenses which were funded by PPP loan proceeds. This is a sharp reversal of the recent guidance issued by the IRS and follows the original expected intent of Congress regarding the forgiveness of PPP loans and related expense deductibility.
Emergency COVID Relief Act of 2020 Guidance For Pass-through Entity Basis
Additionally, the Act provides much-needed guidance regarding basis adjustments for PPP loan forgiveness regarding owners of pass-through entities. Section 278(a)(3) of the Emergency COVID Relief Act of 2020 (the Act) states that:
“in the case of a borrower that is a partnership or S corporation, any amount excluded from income by the Act shall be treated as tax-exempt income” and will receive a basis increase “equal to the partner’s (and shareholder’s) distributive share of deductions resulting from costs giving rise to forgiveness described in…the CARES Act.”
More simply stated, PPP loan forgiveness won’t increase taxable income but will increase the basis.
What Can I Do Now?
As we continue to work through the various tax relief provisions resulting from the Emergency COVID Relief Act of 2020, we fully understand that any tax benefit providing relief to taxpayers and allowing them to hold on to needed cash will be valued at a premium. One of our goals is to search out and help our clients understand the opportunities for those benefits. That said, please work with your Aronson tax advisor to determine the benefits available to you.
If you have any questions or would like to discuss the PPP loan forgiveness and expensing guidance under the Emergency COVID Relief Act of 2020, please feel free to reach out to Grant Patterson.