Initial Guidance for PPP and R&D Tax Credits: Setting the Stage for Congress to Act

Initial guidance issued by the IRS regarding the PPP treatment on 2020 tax returns is not exactly positive for taxpayers claiming the R&D credit. (see: https://www.irs.gov/pub/irs-drop/rr-20-27.pdf).

To paraphrase the Rev. Rul., any PPP loan amount should be not be able to be deducted from general expenses taken in that year. Using the “Tax Benefit Rule”, a moniker for various court cases that created a rule*, the IRS’s current position is that taxpayers must cancel out an equivalent portion of payroll expense deductions by attributing the forgiven portion to their income. This would almost certainly impact the calculation of the eligible R&D expenses, potentially by reducing the qualified research expenditures of employees.

The impacts to R&D credits and those taxpayers could be amplified by the mechanics of the R&D credit calculations requirements to compare current year expenditures to past year expenditures, particularly impacting taxpayers using the Alternative Simplified Credit (ASC) calculation.

We are watching this closely, as the PPP’s intended purpose to aid businesses during a national economic crisis could be undermined on the backend tax treatment universally (through deduction rules) and further through the impact to R&D tax credit eligible companies. We are hopeful this issue comes to the attention of Congress soon, and we are reaching out currently to Reps. Doggett and Roy.

The R&D tax credit will still be worth pursuing for 2020 tax returns for most taxpayers and we will continue to keep up to date with how the PPP may impact taxpayers in 2020.

*Lawyers love to read, digest, and create “black letter law” from court cases and give them names for shorthand. Black letter law is a way to distill the elements, facts, application, and rulings of court cases into a way that conforms to how courts would likely decide cases.