Home Health & Hospice Week

Take action now if you’re not expecting Paycheck Protection Program loan forgiveness.

Some new clarifications from the Internal Revenue Service indicate when your PPP loans are tax deductible — but you may not like the answer.

Background: Back in April, the IRS announced the CARES Act Paycheck Protection Program loans would not be tax deductible if forgiven (see HCW by AAPC, Vol. XXIX, No. 17). Health care providers “were taken off guard when the IRS determined that qualifying expenses would not be deductible once loan forgiveness was secured,” says The Health Group in Morgantown, West Virginia. “Additionally, taxpayers hoped that legislative action would be taken to allow the deductibility of expenses.” Further, “many taxpayers believed, or at least hoped, that expenses used to support PPP loan forgiveness would need to be addressed in the year that loan forgiveness was secured,” the consulting firm says in its electronic newsletter.

But Congress hasn’t passed any help, and now the IRS has issued more bad news.

In a safe harbor released last month in Rev. Rul. 2020-27, the IRS confirms that the PPP funds are indeed not deductible. It also clarifies that they are nondeductible even when the loan isn’t forgiven yet. “An otherwise allowable deduction is disallowed if there is a reasonable expectation of reimbursement,” the IRS notes in the document.

In other words, if you expect your PPP loan to be forgiven in 2021, you still have to pay taxes on the proceeds in 2020, the IRS explains.

“The IRS did not detail what would constitute a ‘reasonable expectation,’” note attorneys Hannah Fischer Frey and Jesse Sitz with law firm Baird Holm. But “the fact that a PPP borrower submits a forgiveness application would seem to indicate that the PPP borrower believes a reasonable expectation exists for forgiveness,” Fischer Frey and Sitz offer in online analysis.

What about if that expectation doesn’t come to pass? “Presumably, if all or a portion of a PPP loan is not forgiven until after a PPP borrower files its income tax return, the PPP borrower could amend its 2020 income tax return to take deductions that were incurred with PPP loan proceeds that were not forgiven,” Fischer Frey and Sitz advise.

In a second safe harbor released last month, Rev. Proc. 2020-51, the IRS allows taxpayers to claim a deduction for PPP loans if they are not forgiven.

Do this: “Businesses that obtained PPP loans and have requested forgiveness from lenders should continue to monitor the status of the loan forgiveness request,” counsel attorneys Adam Young and Maureen Monaghan with law firm Fox Rothschild. “To the extent that the lender does not forgive the PPP loan, the business may be eligible to deduct certain eligible expenses that it would not have been eligible to deduct if the PPP loan was forgiven,” Young and Monaghan point out in online analysis.

“It is prudent for all taxpayers who are seeking PPP loan forgiveness to understand whether or not, and when, it can deduct expenses incurred with the loan proceeds and the tax impact that may arise from the lack of deductibility if the loan is forgiven,” urge attorneys Alan Fershtman, Margaret Kubicki, TW Langevin, and Mark E. Sims with law firm Keating, Muething & Klekamp in online analysis.

In light of the safe harbor clarifying that providers must pay taxes on PPP loan proceeds this year, business should consider a few steps, suggests Dan Krafft with Von Lehman & Co.