If not, are my PPP expenses deductible?
The CARES Act states that an eligible recipient of a PPP loan can request debt forgiveness on amounts used to pay covered expenses (i.e. Payroll costs, etc.). It also states that any forgiven amounts should not be included as taxable income.
But in May, the IRS came out and stated any expenses paid with forgiven PPP funds were not deductible for tax purposes. Therefore, effectively increasing your taxable income by the PPP loan forgiveness amount.
Then in November, the IRS issued guidance saying, if there is a reasonable expectation of loan forgiveness the eligible PPP loan expenses are non-deductible for 2020, regardless of when forgiveness is applied for or granted.
This means you won’t be able to wait until 2021 to apply for loan forgiveness in hopes of delaying the tax consequences.
With the series of twists and turns that have seen the PPP program benefits deteriorate over time, this most recent change may be the most difficult for business owners to handle. Since many small businesses are still struggling to make ends meet, increasing their tax burden before the economy has a chance to recover, could be devastating.
What does this mean for me and my business?
At this point, it means the loan forgiveness itself will not be considered taxable income, but any PPP funds that were used for eligible expenses will not be tax deductible, if you expect loan forgiveness.
As a result your taxable net income will be increased by the amount of your forgivable PPP loan, effectively making the forgivable amount taxable income.
This could have a drastic impact on your tax situation.
Lets say for example you expect to have $100k of net income for 2020, and you also received $100k of PPP loans that you expect will be forgiven. In this example, you would be increasing your taxable net income by $100k (to $200k total), effectively doubling your net income.
Depending on your situation, and your other income sources, you could be thrust into the top tax bracket, resulting in a much larger tax burden than expected. If you are one of the businesses that are truly hurting, you will be hard pressed to find these additional funds to cover this unexpected tax burden.
You still have options.
The book isn’t closed yet, with Bills pending in congress and the AICPA fighting for deductibility of PPP expenses, there is still hope relief will come for America’s small businesses.
If you have questions about your PPP loan or how it may affect your tax situation give us a call and one of our tax specialists will help evaluate your situation and determine your best options. Schedule a free strategy call HERE.
BDK Advisors – For all your Tax, Tax Planning, and Tax Resolution needs!