On November 23, 2020, we posted about the legal deductibility of expenses paid in 2020 with funds borrowed through PPP (Paycheck Protection Program) loans guaranteed by the government and subject to discharge as debts once it was shown that the loan proceeds were used to pay payroll and other approved expenses. If you owned a law firm and got one or more of these loans this issue directly affected you. But if you live outside that orbit, “Why care?”
The answer is because it is going to affect business income for alimony and child support in 2021 and business valuations going forward for a few years. The tax bill passed just after Christmas changed the landscape and created a boon for business owners. The original plan was to forgive the loan but deny the deduction as an expense as the expense was effectively paid by the government guaranteed loan being discharged. That’s what we wrote about in November. The late December law (The Consolidated Appropriations Act, 2021) is allowing the business owner to be discharged from the debt AND still deduct the expenses even though the government is effectively paying those expenses.
In a support setting, the business owner is getting a windfall. Assume she paid $200,000 in wages and qualifying expenses with the money from the PPP loan. That loan is going to be discharged without any payment by the borrower so long as it was properly paid. Meanwhile, the IRS is being instructed to permit the business owner to take the deduction for the wages, even though the government effectively paid them. Therefore, the business owner effectively received a $200,000 subsidy from the Congress. Should that be treated as “income” under 23 Pa.C.S. 4302 or an asset? Depends upon which side of the box you approach from.
In a business valuation setting, the business has received a one-time “subsidy.” The American Institute of Certified Public Accountants is still grappling with how to “account” for this and has made inquiries to the IRS. The request, published March 16, 2021, can be found here at journalofaccountancy.com. The jury remains out on whether 2020 should be a year “tossed” from data used to assess normalized income or whether the data from 2020 is meaningful. While it is clear that many industries collapsed (travel, leisure, dining, entertainment) many others had a normal year and still others (builders, home improvement) prospered immensely. The argument, which occurs to this writer, is that Americans who were unable to spend income on travel and leisure shifted those expenses to home purchases and improvements. Whether in a support or valuation setting, lawyers need to be thinking about how PPP money should be “booked” in their client’s world.
Breaking News: The IRS announced on March 17 that the traditional April 15 filing deadline for personal returns would be delayed to May 17. Click here to read the March 17, 2021 article from Journal Of Accountancy. Formal guidance is forthcoming but the press release indicates that this applies not only to the returns but the payment due date.