Taxable Effects - Loan Forgiveness

[Edsel]

Assume $150,000 in costs eligible for loan forgiveness, and for whatever reason the entire forgiveness is $160,000 and 941 payroll tax credits are $70,000.  In other words there is an $80,000 windfall.  Which of the above describes treatment on a 2020 tax return?

a)  Revenue of $230,000 costs of $150,000 for a taxable profit of $80,000.

b)  Revenue of $0, costs of $0, "Other Income" of $80,000 for a taxable profit of $80,000.

c)  Revenue of $0, costs of $0 for no taxable profit because the intent of the loan forgiveness stimulus was to not tax the recipient.

 

[Lion EA]

We don't know the results of forgiveness yet. We know the COD will not be taxable income, so not a). But, we don't know the theory or the forms/schedules/lines.

[Lee B]

Actually according to an article in Forbes, under current tax law, if the loan is forgiven then the expenses which were paid with forgiven proceeds are not deductible !

Tax experts have been talking to the Senate Finance Cmte, since this was supposedly not the intent of Congress !

However so far Senate Finance Cmte is just listening? We will see what happens ?

[Lion EA]

And, each bank probably will determine forgiveness for its own loans, no matter how the law reads, just like they did with application approvals!

[Edsel]

It makes sense that the expenses matched with the loan forgiveness should not be deductible.  That lends credence to showing zero revenue.  The question becomes:  Is the associated amount left over and NOT forgiven deductible?  I would think so.  Or what about the obverse - If the amount forgiven EXCEEDS the associated expenses, then is the excess taxable?

If we're wondering how the forgiven amount can exceed the expenses - it probably cannot.  However, also associated with the payroll expenses is a large payroll tax credit.  The amount forgiven PLUS the payroll tax credit could easily exceed the associated expenses.

 

[Lion EA]

You're not to use two different programs for the same expenses or for the same employees. We don't have much guidance on forgiveness yet. And, your bank might not interpret the guidance the same as my bank. Ask your bank. Tell your clients to ask their banks. I've heard it suggested to put loan proceeds into a separate account and use that account for appropriate expenses to make it easier to document come forgiveness time. So, we do have to listen to our banks now to prepare.

[Edsel]

Yes, listen to the banks because loan terms change every day.  The banks are just as befuddled as we are.  And they will not be telling their applicants how to report this on their taxes.

[JohnH]

I definitely agree with Lion regarding using a separate account. There's too much at stake not to have a solid audit trail for the transactions and proof positive that there was no commingling of funds (by any bureaucratic definition).