ALERT: Did Your Business Get a PPP Loan? If so, this is a must read…
UPDATE @ 1/9/2021: The information below has been updated based on the recent stimulus package created by Congress. You can read more about it via this excellent article @Nav
Let’s get right to it…
Did your business get a Paycheck Protection Program (PPP) loan?
If so, there is a wicked surprise awaiting you! (unless you already know the secret…)
As of the date of this article (December 3, 2020), the surprise is this…
The expenses you claim as part of your PPP loan forgiveness will NOT be deductible on your business tax return for 2020 (or beyond).
Yes, you read that correctly.
Those expenses such as payroll, utilities, rent, etc. will NOT be deductible on your 2020 tax return.
THE IRS RULES
The IRS just released Revenue Ruling 2020-27 and Revenue Procedure 2020-51 to clarify the rules for deducting expenses paid with PPP funds.
In those rulings, they have doubled down on their stance that businesses are unable to deduct these PPP related expenses.
Make that a double ouch!
LET’S LOOK AT A SIMPLE EXAMPLE…
Let’s say your business has $100,000 of revenue and $20,000 of payroll expenses.
Before the world knew about PPP loans, when it came time to file your taxes, your taxable business income would be $80,000 ($100,000 – $20,000).
Enter PPP loans and related forgiveness.
Under the IRS stance, your business taxable income will be $100,000 instead, since the $20,000 of expenses are not deductible.
It makes no difference if you apply for PPP forgiveness in 2020 or wait until 2021.
See how this can be a wicked surprise if you’re not ready for it?
This can impact your estimated tax payments and tax planning for the business in a big way.
While Congress has said in so many words that this end result was definitely not their intention when the PPP program was created, that’s not how it is working out at the moment.
Be aware – only an act of Congress can overturn the IRS rulings that are currently in place.
Congress has to pass a law that will override the rulings of the IRS on this matter.
Will that happen?
GET WITH YOUR TAX ADVISOR, AND SOON!
I can’t stress enough the importance of huddling up with your tax advisor in the next couple of weeks to assess the impact of these rules on the specifics of your business.
There are far too many nuances within this topic to even begin to address them all in an article like this.
If your tax advisor looks at you with glazed eyes and really doesn’t know much about this topic, you can provide them with these resources:
- Forbes article providing more insights – thanks @Brian Thompson!
- JJ the CPA tells it like it is about PPP expenses – thanks @JJtheCPA!
Naturally, the hope is that Congress actually does step in and solve this problem for tens of thousands of small businesses.
DISCLAIMER: I am not a tax advisor, nor do I play one on TV. This information is provided solely for informational purposes, and you are encouraged to seek professional tax advice for your specific situation.