A report by the Small Business Administration in August showed that more than 5.2 million businesses took advantage of the U.S. Government’s Paycheck Protection Program (PPP) in 2020. The program closed to new loan applications on Aug. 8, and, as businesses prepare to seek loan forgiveness as a part of the program, we’re still seeing a lot of confusion around the rules, the documentation needed, and the tax implications for those who received funds.
Originally, the CARES Act provided that PPP loan recipients who received loan forgiveness would be able to exclude the forgiven amount from their taxable income. That amount supposedly included item such as payroll, mortgage interest, rent and utility payments made during the prescribed loan period. However, IRS guidance released on April 30 states that, as these business groups and associations asserted, seems to reverse the CARES Act’s intent. (Note that the American Institute of CPAs was a signatory to the letter!) Now it seems that while you won’t be taxed for the forgiveness of your loan, you also won’t be allowed to deduct the expenses that you applied to qualify for loan forgiveness, which could lead to a much larger tax bill.
A Sept. 15 article in The Inquirer highlights the problem with a specific example that assumes a $100,000 PPP loan to a business that expects its revenue and profit in 2020 to be similar to 2019. According to author Gene Marks, the business owner seeks loan forgiveness using eligible expenses, such as payroll. If the business owner can’t deduct the $100,000 worth of eligible expenses, then his income will increase by $100,000 without any deductions to offset it — and the business owner will be responsible to pay taxes on that extra $100,000 of income.
Just after the IRS issued its guidance, Treasury Secretary Steven Mnuchin defended it, saying that if the loan forgiveness is not taxable, deducting those expenses would be akin to double dipping. A bipartisan group of lawmakers disagreed, saying it contradicted legislative intent. They immediately introduced new legislation to cancel out the IRS guidance.
Unfortunately, the Small Business Expense Protection Act of 2020 has gone nowhere since its introduction in May, and it’s unclear at this point whether a version of the bill will ever pass. That means that affected businesses need to take stock of their potential tax situation now and start planning ahead.
How Should You Prepare?
Businesses that took PPP loans faced a dilemma as they filed their Q3 taxes earlier this month. Many weren’t sure whether they should seek deductions for PPP-related expenses or pay the higher estimated tax. The problem has been exacerbated by banks telling borrowers they are holding off on accepting loan forgiveness form until they get clarity from the IRS or until new legislation passes. As a result, businesses might end the year not knowing whether their loans will be forgiven.
If you deducted your PPP-related expenses in Q3, hoping that lawmakers will come to the rescue before the end of the year, you may be in luck; but be prepared to level up at the end of the year if the issue hasn’t been resolved. If you did not deduct PPP-related expenses, you may be entitled to a refund later if you overpaid.
For now, the situation still seems fluid, and business owners have many different things to consider — in addition to the status of their PPP loans — in determining how and when to pay their taxes. Your tax adviser is the best person to help you develop a course of action, because he or she will be paying close attention to IRS guidance and any legislation that could affect clients like you.
Our team at AMDG Business Advisory Services is ready and willing to help you with your 2020 tax needs. If we can be of assistance, please contact us here, or by calling 734-737-0855. We look forward to helping your business stay ahead of the curve in 2020 and beyond.