Restaurants that intend to delay a request for forgiveness of their Paycheck Protection Program (PPP) loans until 2021 may be unable to deduct a large portion of standard business expenses from their taxable income this year under a change in policy announced yesterday by the U.S. Department of the Treasury.
The warning issued to small businesses in effect thwarts operators who hit on a way to temper the impact of an earlier controversial ruling by the department. Under that guidance, restaurants could not deduct the portions of their payroll, rent, utility or mortgage expenses that were paid with funds from a forgiven PPP loan. Treasury essentially ruled that taxpayers bore those expenses, not the businesses themselves, and hence the charges were non-deductible in tax filings for 2020. It also noted that reimbursed business expenses are routinely not permissible deductions. Restaurants and other loan recipients would be on the hook for 20% to 30% of the expenses that the PPP was intended to cover.
Because of Treasury’s interpretation, many operators had decided to delay their filing for the forgiveness of a loan, which could range up to $10 million. They reasoned that a postponement would allow them to deduct the covered business expenses as usual for 2020, and they could address the tax impact of their loan being forgiven when their businesses were on a sounder financial footing. The move would leave them with more liquidity on hand for this year or early 2021, since their tax bills for this year would be significantly reduced.
That won’t work if the business has a reasonable expectation that its loan will be forgiven, Treasury said in the updated guidance it issued yesterday. The deductions are disallowed “even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxible year,” Treasury said in its alert.
The re-interpretation will effectively force restaurateurs to forego significant deductions on standard businesses expenses incurred over as long as six-month period, the spending window allotted under the PPP. It comes as states are re-shutting restaurant dining rooms in an attempt to flatten a third surge in coronavirus infections, a trend certain to strain restaurants’ ability to pay standard bills.