On November 23, 2020, we reported on the legal deductibility of expenses paid in 2020 with funds borrowed through government-guaranteed Paycheck Protection Program (PPP) loans that must be paid off as debt once proven that the loan proceeds were used to pay payroll and other approved expenses. If you owned a law firm and received one or more of these loans, you were directly affected by this problem. But if you live outside of that orbit, “why bother?”
The answer is that this will affect business maintenance and child support incomes in 2021 and company valuations for a number of years. The tax return, which was passed shortly after Christmas, changed the landscape and created a boon for business owners. The original plan was to extend the loan but refuse to deduct it as an expense, as the expense was effectively paid by the repayment of the government-guaranteed loan. We wrote about this in November. The late December Act (The Consolidated Appropriations Act, 2021) allows the business owner to be released from debt AND continue to deduct the expenses even though the government is effectively paying those expenses.
In a support environment, the business owner gets a godsend. For example, let’s say she used the money from the PPP loan to pay off $ 200,000 in wages and skilled expenses. This loan is repaid with no payment by the borrower as long as it has been properly paid. Meanwhile, the IRS is instructed to allow the business owner to take the wage deduction even though the government has effectively paid them. Therefore, the business owner effectively received a grant of $ 200,000 from Congress. Should this be treated as “income” under 23 Pa.CS 4302 or as an asset? Depends on which side of the box you are approaching from.
In a company valuation situation, the company received a one-time “subsidy”. The American Institute of Certified Public Accountants is still grappling with how to “account for” this and has been investigating with the IRS. The request published on March 16, 2021 can be found here at journalofaccountancy.com. The jury is unsure whether 2020 is supposed to be a year “tossed” from data used to assess normalized income, or whether the 2020 data is meaningful. While it is clear that many industries collapsed (travel, leisure, food, entertainment), many others had a normal year and still others (builders, home improvement) flourished immensely. The argument this writer can think of is that Americans who had no income to spend on travel and leisure shifted those expenses to home purchases and improvements. Regardless of whether it is a support or review situation, lawyers need to think about how to “book” PPP money in their clients’ world.
Latest news: The IRS announced on March 17th that the traditional April 15th filing deadline for personal returns will be postponed to May 17th. Click here to read the article from the Journal of Accountancy March 17, 2021. Formal guidance is imminent, but the press release states that this applies not only to the return, but also to the payment due date.