By Max Vignola, CCSP
As you may have noticed, 2021 is already proving to be highly unpredictable. In our last Bottom Line post, we discussed the COVID-19 Paycheck Protection Program (“PPP”) and how it might impact the R&D tax credit. The IRS released Notice 2020-32 to give their interpretation stating that forgiven PPP loan proceeds used for otherwise allowable business expenses are not deductible. This was not the intent of Congress.
This disallowance to deduct business expenses derived from PPP loans would have had an unfavorable impact on the R&D tax credit, as deductible payroll expenditures are one of the Qualifying Research Expenses (QRE) for R&D tax credit calculations. If the IRS position were upheld, the net impact to the taxpayer would have been a higher federal tax liability by way of increased taxable income and a reduction of offsetting R&D tax credits.
Thankfully, we received some good news as the recently signed Consolidated Appropriations Act, 2021 has clarified that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided”. This legislation is welcomed news for all that would have felt the sweeping effect of disallowed deductions for expenses paid with PPP funds.
Even more so this is the news needed for R&D tax credit qualifying companies to confirm they can deduct the expenses, and include as QREs for R&D tax credit purposes.
This is a great time to get started on the R&D calculations for 2020 tax filing. Contact your Bedford representative today.