Yeah, that was my first thought. The RR is 2020-27, and it said that in terms of deducting expenses, you couldn’t deduct if you weren’t going to end up paying because forgiveness was a near certainty. Like you, I hope IRS creates some similar grace with new tax law. My first thought on this issue, as documented at our CPA firm website was, “oh gosh surely we don’t need to worry about this…” E.g., see here: https://nelson.cpa/how-taxes-work-for-ppp-loans/

But I think taxpayers probably want to plan if possible as if the basis adjustment occurs in 2021. So, to plan as if RR 2020-27 doesn’t apply.

Tony Nitti in that Forbes article pointed out that if folks didn’t get basis for the PPP forgiveness until 2021 (when lender and SBA approve forgiveness application) that means in 2020, the PPP borrower may lack enough basis to deduct losses and may inadvertently make distributions in excess of basis.

Nitti seems to worry the most about the lost deductions. But to me, that’s not that big a problem. A lack of basis in 2020 means deductions suspended until 2021 when forgiveness occurs. That’s a minor headache. But not that bad in my mind because things net out in a couple of years (hopefully).

I worry about someone who’s business didn’t get sick and so they indirectly use PPP funds to make a big distribution in 2020. Without the basis adjustment, that distribution may be long-term capital gain… and then, yes, in 2021 when they receive forgiveness, they’ll get a bump up in basis. But that may take decades to have impact. E.g., they’ll have a capital loss at sale.

Sorry for the long-winded explanation. I know you know all this. Just trying to explain why I said “seems like less of a problem”…

>Most businesses would have used up the PPP funds paying for payroll…

This may be true, but we see and hear about firms which got PPP loans fearing the worst given the terrible forecasts concerning the pandemic. And then, what some of these firms found was, business didn’t get sick. It stayed healthy. In that case, the business will have PPP leftover.

>Needless to say, you aren’t even allowed to distribute it to an owner anyway.

The above statement is incorrect. BTW, the PPP money was for payroll and other specifically forgivable expenses. But some of the PPP money was always earmarked for owner payments.

>What am I missing here?

Congress with the new law clearly says PPP borrower gets tax-free forgiveness, tax deductions for PPP-funded spending, and also an adjustment up in basis. That’s in the law. This will explain (and quote the statute):

https://nelson.cpa/how-taxes-work-for-ppp-loans/

🙂

Hi Fabian, so your thought was my first thought. And I kind of think IRS could (and maybe should) decide to do that. In some other blog posts about this, I said, “hey, let’s channel the logic of Rev. Ruling 2020-27.)

Does the law say that the owner is allowed to both deduct the expenses AND get additional basis for the amount forgiven? This, again, isn’t logical as the business get the benefit of the deductions for the forgiven loan funds and the shareholder gets an increase in basis for a loan that no longer exists.

What am I missing here?