Your 2020 Taxes Will be Affected by Your PPP!

July 13, 2020

I think we are all going through 2020 under the assumption that our 2020 taxes are going to look different than previous years. This year we’ve seen a few new programs created by the SBA to help small businesses. This means you’re probably going to deal with situations that you’ve never seen before!

PPP Loan Background

The Paycheck Protection Program (PPP) is a true lifeline for business owners that are struggling due to COVID. The PPP is a “loan” intended to provide cash flow assistance for between eight and twenty-four weeks.

What makes the PPP even more enticing is the possibility that the loan can be forgiven, as long the money was spent on the proper activities.

But with this new program came questions about how the IRS will view the money. And more importantly, whether or not we will be taxed on those monies.

Will I be taxed for my forgiven PPP loan?

The CARES Act originally spelled out that the forgiven portion of PPP loans would not be included in taxable income. On one side, this makes sense as the aim of the program is to provide businesses with working capital. The goal was not to create a tax burden for those receiving the funds!

There’s always a catch. The IRS has since released a notice clarifying how the forgiven amount would be treated on your 2020 taxes:

“This notice clarifies 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 pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”

Now in laymen’s terms. If the forgiven amount isn’t included in taxable income, then the expenses paid for with those monies cannot be taken as a deduction. That may sound like a small detail but can still have a big impact on your 2020 taxes.

What does this look like on my tax return?

Payroll, mortgage interest, rent, and utility expenses are typically deducted from taxable income in any ordinary year. This offset, in effect, lowers your taxable income. Without this deduction, you would owe more in taxes.

This is exactly how we can interpret the monies forgiven from the PPP loan program.

For example, let’s say you received $100k in a PPP loan. You used that money solely on payroll expenses. The $100k that you receive won’t be included in taxable income at the end of the year. However, at the same time, there will not be deductions on the expenses that were paid with that $100k.

This means that you could have an extra $21k tax liability ($100k * 21% corp. tax rate) that you wouldn’t have in any other year.

While the program did provide you with an extra $100k, you’re “losing” $21k in tax deductions that you’d normally get. In this example, you’re still going to have a net benefit of $79k — money that you probably wouldn’t have otherwise. But for business owners, we don’t want you to get caught off guard at the end of the year.

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