The Payroll Protection Act was established to protect employees’ jobs by providing funds to pay employee wages. However, if a federal bill currently in consideration in D.C, does not change, the PPP guidelines currently in place will have tax consequences.
Under the current guidelines, if your PPP Loan is forgiven, none of the expenses that were funded by your forgiven loan are tax deductible – not even the employee wages it was designed to protect.
It’s important to note three things:
- When your PPP loan is forgiven, the PPP loan becomes non-taxable income.
- When you prepare your taxes, you may still deduct your standard business expenses, including payroll, with the exception of any expenses paid with your forgiven PPP funds.
- You may owe much more in taxes than you had originally planned.
What should businesses do?
On August 4th the AICPA, along with 170 other organizations, urged Congress to “include a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Program (PPP)” in its next round of legislation addressing the coronavirus pandemic. While Congress has denied a bill that will allow for deductions, if you are a PPP loan recipient, you should start your tax planning now. PBO Advisory Group is working with clients to develop various scenarios, ranging from best-case – full exemption is granted by Congress, to worst-case – no changes to the current guidelines.
Taking the worst-case scenario, we will help you identify your best- and worst-case tax picture. We will then work with you to identify the best tax mitigation strategy based on your current business and cash flow situation. Whether you file your taxes on a cash or accrual basis will influence your plan, but the goal will be the same: help reduce your 2020 tax liability.
While we are suggesting that clients operate under the worst-case scenario, Congress is currently debating the Small Business Expense Protection Act of 2020, which may mean changes are coming. However, as of now, there are no guarantees that the act will become law.
- CONFER WITH YOUR CPA
With your worst-case plan in hand, the next step is to talk with your CPA. The current PPP tax liability guidelines are fuzzy and open to interpretation. This, combined with your unique situation, could affect your tax bill so it is important to hear from your tax professional.
- APPLY FOR FORGIVENESS
With business moving forward and time passing since receiving your loan, it might be easy to forget this vital step. We suggest that businesses apply for forgiveness to their PPP lender by October as the bank will need time to review your application. Be sure to familiarize yourself with the application process, as the process differs from vendor to vendor.
PBO Advisory Group is here to help. Please contact us if you would like to receive more information about PPP tax exemptions, loan forgiveness, tax planning, and more. We will keep you posted as to the status of the Small Business Expenses Protection Act and any applicable changes that may occur.