Tax Research Memo

Description

Background:

The accountant for George’s Plumbing, Inc. has approached you for some tax advice about how to handle some items on the income tax return for the business. The business is a C corporation. The corporation is a calendar year end, cash basis taxpayer. The business suffered a significant downturn in 2019 due to COVID so in 2020 the business obtained a Paycheck Protection Program (“PPP”) loan of $2 million to cover payroll, employee health care costs, rent and utilities. The loan covered all the costs so you can safely assume all of the $2 million dollars was used to pay for the cost of payroll, employee health care costs, rent and utilities.

The business now wants to apply for the forgiveness of the PPP loan but needs advice for the following: 1. Was the PPP loan taxable to George’s Plumbing, Inc. when it was received in the 2020 tax year? 2. Can the expenses that were incurred by the business in 2020 for the costs of the payroll, health care costs for the employees, rent and utilities be claimed as in income tax deduction on the 2020 income tax return? 3. If the business applies for forgiveness of the loan in 2021 will the forgiveness of the debt be regarded as cancellation of debt income (“CODI”) and taxable to the corporation?

You research should consider the following (but it is not an exhaustive list): IRC §61 IRC §108 IRC §162 IRC §163 IRC §265 

Your responsibility: Prepare a tax research memo addressing the question that has been raised.

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