The Coronavirus Aid, Relief, and Economic Security (CARES) Act included the Paycheck Protection Program (PPP), which administers loans through the Small Business Administration (SBA). Many dental practices received these PPP loans, and there’s much to consider regarding debt forgiveness.
PPP loan forgiveness qualifications
Let’s start with the basics: at the end of the covered period, you may apply for forgiveness of your PPP loan. Some or all of the PPP loan may be forgiven based upon your organization doing one or more of the following:
- Spending at least 60% of the loan amount on qualifying payroll costs
- Satisfying a full-time equivalent test
- Satisfying a requirement to maintain salary and hourly wage levels
- Incurring and paying other qualifying costs
Note that any amount of PPP loan debt discharge is excluded from gross income for federal income tax purposes.
The issue of deductibility of expenses is in a state of flux.
If the PPP loan forgiveness occurs in the same year as the qualifying costs, the IRS guidance in IRS Notice 2020-32 states that the deductions are not allowed. However, the IRS failed to provide guidance on which deductions to disallow. At least 60% of the PPP loan forgiveness must be associated with payroll costs, which includes W-2 gross payroll. To the extent W-2 expenses are disallowed, your qualified business income deduction may be reduced.
The IRS also failed to provide guidance regarding deductibility of expenses when PPP loan forgiveness occurs in the year subsequent to the year in which the qualifying costs are paid. Consider delaying your application for PPP loan forgiveness so that forgiveness occurs in the subsequent year. The IRS may provide additional guidance on the deductibility of the expenses in situations where forgiveness is reasonably certain.
Bills have been submitted in Congress to effectively overturn the IRS guidance in IRS Notice 2020-32, but Congress has not yet passed legislation to overturn that notice. In the meantime, treat qualifying expenses as deductible until you have been notified of forgiveness.
Take a look at your marginal tax rate, since your marginal tax bracket may be higher in the subsequent year. Legislation may pass that enacts tax increases to be effective in 2021. You may want to disallow the expenses in the current year (which will increase current year income) rather than increasing income in the year of forgiveness. Pending IRS guidance on the issue, disallowing deductions for the expenses in the year incurred may be a reasonable position.
As always, consult with your tax advisor to evaluate the choices available based upon the specific facts and circumstances involved. The final decision must be made by the time you file your tax return for the year in which the deductions were incurred and paid.
For more information on PPP loan forgiveness, contact Brian Heyndrickx at [email protected] or 1-920-996-1177
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
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By: Brian Heyndrickx and Chris Hesse, CliftonLarsonAllen