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Watch out for the paycheck protection program’s tax sting in the tail

By December 6, 2020December 7th, 2020No Comments

(This post originally appeared on The Guardian)

Congress is considering a new stimulus bill, which includes another round of paycheck protection program (PPP) funds targeted at specific businesses that have suffered revenue declines. That’s good news. But one big thing may be missing from this new legislation: a certain tax deduction that, if not allowed, could be very costly for any small business that received a forgivable PPP loan this year.

If your business received a PPP loan this year, you could be facing a big tax bill because of it. No, it’s not on the amount forgiven. That won’t be taxable. But as of now any expenses that you used to apply for forgiveness wouldn’t be deductible. And that’s a problem. Let me explain.

Let’s say you – like so many others panicking earlier this year – received a PPP loan. However, you’ve managed to navigate your way through the pandemic. If that’s the case, then you’re not alone. Many small businesses received their loans because not only were they allowed to do so at the time but the future was very unknown. The funding was a big help to keep employees working, particularly when the economy was at a standstill. But then the economy recovered, many businesses didn’t suffer as much as feared and profits are winding up to be about the same as last year, maybe a little less or even a little more.

If this sounds like your business, then you may have a tax problem. You’ve probably been paying in your estimated taxes this year based on last year’s income. If this year’s income is around the same, you’re going to have a big chunk of expenses that you can’t deduct because you used them – or plan to use them – for PPP forgiveness. Which means your taxable income will be much higher this year. Which also means you’re going to owe more taxes than you’ve been paying in. The IRS is fully aware of the issue and even recently issued “guidance” clarifying the non-deductibility of these expenses.

Accountants and some legislators are not happy about that.

“PPP recipients – particularly small businesses – cannot afford to be surprised with a tax bill next year on their PPP loan expenses and more than ever before need to be able to project how much cash they will have to cover their basic expenses,” said the American Institute of Certified Public Accountants’ vice-president of taxation, Edward Karl, CPA in a statement. “Members of Congress must act now and pass this legislation to ensure that struggling businesses and their owners can recover.”

The good news is that Congress may be listening. “Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close,” the Senate finance committee chairman, Chuck Grassley, and Democratic senator Ron Wyden wrote in a letter to the treasury secretary, Steve Mnuchin.

$908bn stimulus proposal agreed on this week by a bipartisan group of legislators did include a provision to allow these expenses to be deductible. However, a counter-proposal from the Senate majority leader, Mitch McConnell, did not. A final bill will certainly still have a long way to travel – and will have many changes to it – before it ever becomes law, assuming it does. If no agreement is reached, then that tax rule will remain in effect.

Call me a naive optimist but I do believe that this issue will be addressed by Congress and the deductibility of these expenses will be allowed. But that’s just my guess. In the meantime, small businesses owners must simply wait. Most of the accountants I know are already telling their clients to extend their 2020 tax returns until next fall. More legislation will inevitably be passed and when it does it may – or may not – address this potentially expensive issue. Let’s hope it does.

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