PPP Loan Borrowers Should Consider Potential Tax Obligations Related to Loan Forgiveness

Paycheck Protection Program (PPP) loan borrowers need to think beyond applying for loan forgiveness to the tax ramifications associated with forgiveness, especially as the calendar year-end nears and tax issues are top of mind.

According to the CARES Act, PPP loan funds are not taxable. However, in May the IRS issued notice 2020-32 making the expenses used to generate forgiveness taxable. Congress has expressed disappointment with the IRS position but has not yet passed legislation to overturn it. Many believe it will be addressed in the next round of stimulus legislation. However, several pieces of proposed PPP legislation do not address the IRS position, leaving the question of whether Congress fully intends to act on the IRS position.

Several tax credits and deductions available to businesses, including the research and development (R&D) tax credit, work opportunity tax credit (WOTC), and qualified business income (QBI) deduction rely at least partially on employee wage calculations. Due to the IRS ruling, borrowers using wages to support PPP loan forgiveness could lose those tax credits and deductions. As such, they should carefully consider how they support forgiveness, including using costs other than gross payroll on their forgiveness applications.

Unless Congress legislates otherwise, borrowers should prepare to pay taxes on PPP loan forgiveness expenses, including in their estimated payments and year-end tax planning. As program regulations disallow the use of PPP funds and many COVID-19 relief grants and loans to pay taxes, borrowers should consult their CPAs before dedicating any relief program funds to tax obligations.

Borrowers also need to be vigilant about how their states will treat tax obligations relating to PPP loans. Many states have yet to declare a position on how PPP loans or the associated forgiveness expenses could be taxed. Borrowers should watch for guidance and be prepared to meet any tax obligations.

To discuss your tax obligations with respect to your PPP loan and associated forgiveness, contact your HBK Advisor.

About the Author(s)

Amy M. Reynallt, MBA
Amy Reynallt is a Manager with the HBK Manufacturing Solutions Group in the Youngstown, Ohio office of HBK CPAs & Consultants. She is experienced in navigating the strategic and financial matters associated with manufacturing and works closely with manufacturers to help them plan, execute, and meet their short- and long-term financial goals. Amy can be reached at 330-758-8613 or by email at areynallt@hbkcpa.com.

Ben DiGirolamo, CPA, JD
Ben DiGirolamo is a Principal in the HBK Tax Advisory Group and works in the Youngstown, OH office. He has been with the firm since 2009 and focuses on entity tax issues, entity planning and flow-through taxation. Ben can be reached at 330-758-8613 or by email at bdigirolamo@hbkcpa.com.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.