Many CTA clients have been wondering how their PPP Loans and Loan Forgiveness applications would affect their 2020 tax returns, and by extension, their R&D Credits. Thankfully, congress addressed the issue over the Christmas break.
The omnibus spending and coronavirus relief bill passed by Congress was signed into law on Dec. 27. The bill clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.
The CARES act provided that PPP loan forgiveness would not trigger taxable income. However, in April 2020, the IRS issued Notice 2020-32, asserting that forgiven PPP loan proceeds used for otherwise allowable business expenses would not be deductible on the 2020 tax return. In November, the IRS further ruled that the disallowance of deductions must occur in the 2020 tax year. Rev Rule 2020-27. The new Coronavirus Relief Bill supersedes IRS guidance that such expenses could not be deducted, and brings the policy in line with what the AICPA and hundreds of other business associations have argued was Congress’s intent when it created the original PPP.
The bill also makes permanent the Sec. 179D deduction for energy-efficient commercial buildings (the amount will be inflation-adjusted after 2020), which many CTA clients take advantage of.
In the wake of COVID, Congress has also created several new tax credits to reimburse employers for the costs of providing paid sick leave and paid family and medical leave to employees unable to work because of the coronavirus. In some cases, Employers receiving a PPP loan are not eligible for these credits. In other cases, wages and health plan expenses for which the employer takes a credit are not eligible for PPP loan forgiveness.
CTA does not expect an effect on R&D expenditures or a decrease in R&D tax credits for the 2020 tax year as a result of PPP loan forgiveness. As usual, any unused R&D Credits can be carried forward for up to 20 years. We suggest that you reach out to your regular tax preparer to determine which credits are available to your business, and how to best structure your Loan Forgiveness application.
