In August of 2020, the IRS weighed in on the deductibility of the expenses used as the basis for a company’s PPP loan forgiveness application. Unfortunately for taxpayers, the IRS made the determination that any expenses claimed as part of a company’s PPP loan forgiveness application would not be deductible on their 2020 tax return. While this position appears to conflict with the original intent behind the PPP program, the IRS is not expected to change its guidance unless congress were to make a technical correction to address the tax treatment of these expenses.
As a result, business owners are being forced to determine whether the benefit of applying for loan forgiveness is justified by the potential tax implications. Under the current IRS guidance if a taxpayer applies for forgiveness their taxable income will increase by the value of the forgiven loan. The tax impact is compounded further for companies who claim the R&D tax credit.
The R&D tax credit is available for the development or improvement of products, processes, techniques, formulas, inventions, or software and is a dollar-for-dollar credit against the taxpayer’s federal income tax liability. The credit is based on the taxpayer’s qualifying expenses in three areas: research wages, research supplies, and contract research. In a normal year, this means that companies can get a twofold tax benefit from qualifying expenses — a deduction in the year the expense is paid and a credit against their taxes.
However, 2020 has proven to be anything but a normal year. As mentioned above, any wages claimed as part of the company’s PPP loan forgiveness application are not deductible for tax purposes. Since these wages are no longer being deducted on the tax return, they are also not eligible to be included in the calculation of the R&D tax credit and will reduce the value of the credit being generated. So, not only will taxpayers who apply for PPP loan forgiveness see an increase in their taxable income but also a decrease in their R&D tax credits.
In most cases the benefit of receiving full forgiveness of the PPP loan outweighs any increase in taxable income or decrease in the R&D tax credit. These impacts do, however, underscore the importance of understanding all your options related to how loan forgiveness can be calculated.
If you have questions about the information provided above or need assistance maximizing loan forgiveness, Clayton & McKervey can help. For additional information call us at 248.208.8860 or click here to contact us. We look forward to speaking with you soon.