There is a catch. There is always a catch. Right…?
Well, maybe. Let me explain. The Paycheck Protection Program (PPP) has been a lifeline for many businesses. This program provides potentially forgivable loans to businesses with certain restrictions on the way the funds can be utilized. It has pumped billions of dollars into the U.S. economy, has allowed businesses to retain employees during this pandemic, and has helped suspend the overall shock from COVID-19 nationwide.
Ok, that sounds great! But what’s the catch?
Your 2020 tax bill might be higher than you expect! That’s the catch.
In a recent notice (2020-32) from the IRS, they clarified that, “…no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan…”
Okay. So, what does that mean in plain English?
If you received a PPP loan that is ultimately forgiven, you can’t deduct the expenses (on your tax return) that the PPP loan paid for.
Hmmm that’s Interesting, but I still don’t understand. Please give me an example.
No problem! Assume your business received a PPP loan of $25,000. Your business used the entire $25,000 toward covered expenses, and luckily the entire loan amount was forgiven. Let’s take a look at the following hypothetical 2020 tax scenario to see the impact.
In the above scenario, when the PPP loan was forgiven, the expenses that the PPP loan paid for are no longer considered tax deductible. This resulted in $5,000 of additional tax due. Ultimately, you should receive a net benefit if the PPP Loan is forgiven. Just keep in mind that if your PPP loan is forgiven, your 2020 tax bill might be higher than you otherwise anticipated.
It is also worth noting that a few members of Congress have proposed allowing a tax deduction for forgiven PPP funds. However, until a new law is passed, Notice 2020-32 will continue to provide the guidance on this matter.
We urge you to speak to your tax advisor regarding your 2020 taxes and how your PPP funds might impact your 2020 tax liability. If you have any additional questions, please contact our team. If you, or someone you know, needs assistance, please be sure to reach out. Our advisors are available to answer all of your money questions: Info@CPSInvest.com
Sterling J Searcy Jr | CPA