Paycheck Protection Program (PPP) loan forgiveness and its tax implication are steeped in uncertainty. The key challenges are the timing of income recognition and deductibility of expenses.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows a taxpayer to exclude from gross income any amount forgiven under the PPP. Subsequently, the IRS released guidance (Notice 2020-32) to explain that a taxpayer that receives a loan through the Paycheck Protection Program (PPP) is not permitted to deduct expenses that are normally deductible under the Code, to the extent the expenses were reimbursed by a PPP loan that was then forgiven. The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses. The American Institute of CPAs (AICPA) believes that the IRS's interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress's intent, and urged Congress to make a technical correction to fix the tax treatment. Thus, this tax treatment can be changed later this year or in 2021 but for now we recommend that you calculate estimated tax amounts according to the IRS's interpretation.
If you plan to apply the PPP loan forgiveness in 2020 but are not sure to receive forgiveness by the end of 2020, it would be difficult to determine projected taxable income for estimated tax calculation purposes. In this case, we recommend that you calculate estimated tax amounts assuming the deduction is disallowed in 2020 to avoid tax penalties.