I attended a seminar offered by accountant, Mitchell E. Benson, CPA, MT, CFF (Savran Benson LLP), Brian C. Vertz, Esquire (Pollock Begg) and Aliah Molczan (Savran Benson LLP) on July 9, 2020. One of the topics discussed was the Payroll Protection Plan (PPP) loans, which were distributed in the second quarter of 2020 to allow employers to keep staff on payroll through June 30, 2020. The tax aspects of this plan are still in a state of flux, and there are conflicting IRS and Congressional interpretation of what it means.
These funds were technically a “loan” issued with the intention that repayment will be forgiven or discharged if the funds were demonstrably employed to pay wages and other classified expenses. Much of that money is already spent by those who received the loans. For accounting purposes, the cash is gone, but as of June 30, 2020, the loan remains a debt of the business until the discharge is granted.
While the precise terms and date of the discharge remain somewhat murky, almost everyone agrees that these loans will be discharged so long as the terms of use were followed. From a tax viewpoint that brings in a question of whether the discharge will occur in the 2020 tax year or later. Under federal law, the discharge of indebtedness is ordinarily income to the person who had the obligation discharged. 26 U.S.C. 61(a)(11). The statute authorizing the PPP loans makes clear that is not the case. BUT, let’s assume you have a small business and you had a $250,000 PPP loan. You used it to pay payroll and other prescribed expenses between May 1, 2020 and June 30, 2020. Your loan, which you employed to pay those expenses, is discharged. Can you deduct the expenses that were effectively paid by the loan you don’t have to repay? As of today, the IRS says you cannot take those deductions against revenue. Congress says that was not their intent. More complicated is if you file your 2020 business return when due in March 2021. Your loan is not actually forgiven yet. So, you deduct the expense, as would ordinarily be the case. Two months later, your discharge comes through. Amend the return? Keep the return but report the discharge as income? Apparently, these questions remain unresolved and that may be the case for some time. One thing is clear; discharge of debt is “income” for purposes of support under 23 Pa.C.S. 4302 and I have not heard anything about the Pennsylvania General Assembly amending that.
Also mentioned in this seminar were some other lingering issues:
- Many businesses will conclude 2020 with a whopping loss that may be an asset or an income tax offset in future years for purposes of equitable distribution.
- In divorce and support proceedings you should be inquiring what forms of loans and grants were applied for and what their status is. Many folks have loans and benefits stuck in an administrative pipeline that may not fully clear for months. You should be tracking the status of these funds in a support context.
- We have previously written about the ability to use retirement as a hardship withdrawal without penalty and to either spread the income over three tax years, or repay the money to the retirement and reverse the tax event. Also, these transactions become pregnant with tax consequences and my affect support payments or asset distributions beyond 2020. Lastly, if you are making these withdrawals, you had better keep some reliable evidence that your transaction has a relationship to the virus either directly, or because it caused your unemployment. Otherwise, the tax benefit may be lost.