8 MiMfg Magazine December 2020
Premium Associate Member
PPP Double Jeopardy : Loan Forgiveness and Tax Implications
By Bryan Powrozek & Sarah Russell • Clayton & McKervey
In August of 2020 , the U . S . Internal Revenue Service ( IRS ) weighed in on the deductibility of the expenses used as the basis for a company ’ s Paycheck Protection Program ( 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 makes 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 Research & Experimentation ( R & E ) tax credit .
The R & E tax credit is available for the development or improvement of products , processes , techniques , formulas , inventions or software and is a dollar-fordollar 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 two-fold 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 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 & E 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 & E 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 & E tax credit . These impacts do , however , underscore the importance of understanding all your options related to how loan forgiveness can be calculated . 6
Bryan Powrozek is a Senior Manager in Clayton & McKervey ’ s Industrial Automation practice , focused on Research & Experimentation Tax Credits . He may be reached at 248-208-8860 or bpowrozek @ claytonmckervey . com .
Sarah Russell leads Clayton & McKervey ’ s tax department and is a leading international tax expert . She may be reached at 248.208.8860 or srussell @ claytonmckervey . com .
Clayton McKervey is an MMA Premium Associate Member and has been an MMA member company since February 2018 . Visit online : claytonmckervey . com .
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