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August 4, 2020PPP Loan and the Hidden Tax Danger
At this point, we’ve all heard about the SBA’s Paycheck Protection Program (PPP) that was rolled out as a part of the Cares Act. There’s even a good chance that you have taken part in this program. While the PPP has many potential benefits to business owners during the COVID-19 crisis, there may be some hidden dangers in it, as well. In today’s blog, I’m going to share some very important information with you. The purpose of sharing this with you is to inform you of some of the hidden danger business owners face with the PPP loan, and hopefully help you to avoid any troubles.
PPP Loans and The Hidden Tax Danger
Before we dig into today’s subject matter, I want to make it abundantly clear that I am NOT providing advice. The purpose of this article is to provide you with an informational and educational resource. You should ALWAYS speak with your personal advisor to determine which course of action is best for your unique circumstance. Since the original publication of this post, the government has passed the Consolidated Appropriations Act (CAA). This new legislation has modified the original language of the CARES Act and allows PPP recipients to deduct the forgivable expenses. Click here for a more detailed view of the PPP provisions outlined in the CAA.
Watch “PPP Loan and the Hidden Tax Danger” on YouTube.
Now that that’s out of the way, let’s dive into the issue at hand. Several weeks ago, I mentioned a problem that might arise from the PPP loan. As many of you know, I enjoy reading things that most people find tedious. As such, I read the entire Cares Act when it was first released. Going through the legislation, line-by-line, something stood out to me. My initial thoughts on this issue were confirmed by the IRS on April 30th, 2020.
What’s The Big Deal?
Under section 1106 of the Cares Act, it states that the amounts that are forgiven on a PPP loan “shall be excluded from gross income.” So the loan can be forgiven and then be deducted from your taxes, right? Not so fast! The IRS seems to say otherwise. According to section 265 of the IRC, expenses “allocable to” tax-exempt income are not deductible. The reason they’ve written it this way is to prevent a “double-dipping” of tax benefits. This was confirmed by the IRS with the release of Notice 2020-32.
So what does this mean? Basically, if you received $100,000 through PPP loans and spent $75,000 on payroll and $25,000 on rent and utilities, the loan is forgiven in full. However, the business can no longer count the forgiven amount of the loan towards their deductible expenses. Although the proceeds of the PPP loan are not taxable, they do remove your ability to write off expenses equal to the forgiven portion of the loan. This is the PPP loan’s hidden danger.
Download: SBA’s PPP Loan Forgiveness Application 3508EZ Form
What Should We Do?
Now’s the time to speak with your planners. If you don’t have a reliable and forward-thinking planner, reach out to us! We have several planners that could really help you to navigate the tax dangers associated with PPP loans. If you do have a planner that you trust, fantastic! Plan to meet with them several times this year. Start discussing your strategy with them immediately.
The second thing that we can do, as business owners, is to keep pristine records that are completely up to date. Your bank will need the exact details related to your expenses for maximum forgiveness. Don’t fall behind on your bookkeeping. We, at Financially Simple, know that keeping track of all of your PPP expenses and records AND your regular day-to-day books can be challenging. That’s why we’ve put together the Financially Simple PPP Expense Tracker! It’s completely free and it is a great tool for keeping your expenses in order.
Folks, this is big news and it could be a real danger to many of us. However, we MUST be proactive and create a plan to attack this head-on. I hope that this has given you enough information to begin a dialogue with your advisory team. Just like they used to say in the old G.I. Joe cartoons, “Now you know, and knowing is half the battle!”
How has your own advisory team helped you during the COVID-19 crisis? If you have any questions or are just dissatisfied with their service, please contact us! We are here to help!
