PPP Forgiveness Rules
The SBA’s Paycheck Protection Program (PPP) has been a financial saving grace for many businesses, but not without an onslaught of roadblocks, headaches, and tear-worth legalese. Is it really the gift that keeps on taking? Let’s just say, in the accounting world “PPP” has been added to the list of expletives.
Brief Background on PPP
In spring 2020, the Small Business Administration (SBA) created a program for businesses to cover two and a half months of wages (back when we all thought the pandemic was going to only last 2.5 months) in the form of a forgivable loan. A business would prove they had employees that were paid prior to the pandemic shut down and then would be approved for a loan. Upon using the money for wages, rent, utilities and meeting other criteria, the loan would no longer be a loan and magically disappear from the business’s debt.
So what’s the problem?
As a business owner I can honestly say this program is the bee’s knees. As a CPA, it is a logistical nightmare. Things can be completed either fast or accurately. The Paycheck Protection Program was pulled together fast and on nation wide scale with a budget of $510.2 billion in funding. The rules changed on a weekly, if not daily basis, and clarity of the instructions never seemed to clarify anything.
One big incentive to the program was the idea of not having to pay the money back. The CARES Act, released in March 2020, explicitly says any forgiven loan proceeds would not be treated as income. Free money? Why not! Seems like a smart business move even for those who weren’t impacted by COVID-19 shut downs. In fact it, some people felt inclined to get the “free money” without even having a legitimate business or employees… but that’s a rant for another day.
Turns out “free” isn’t so free. The IRS released Notice 2020-32 in May 2020 stating that any expenses associated with a forgiven loan do no qualify as deductible expenses for taxes purposes. This has the same impact as having the loan proceeds taxed as business income. Ouch. They recently followed up with Revenue Procedure 2020-51 stating that businesses expenses are not deductible even if the PPP Loan has not yet received forgiveness. Double ouch. Per the IRS, if you believe any portion of your loan will at some point be forgiven, that amount may not be deducted on your 2020 tax return.
Businesses that have done tax planning solely on their year to date income statements are missing a potentially hefty portion of information in calculating tax liability. If your business has a $50,000 profit in 2020, but a $100,000 PPP loan that was used 100% for wages, your business will be paying taxes on $150,000 profit when the return is filed. For those filing Schedule C’s reporting self-employed income, the impact is even greater.
Now what???
Panicking is never an option. Tax planning is everything.
If you have not determined your forgiveness amount yet, now is the time. Work with your CPA or tax preparer to calculate your eligible forgiveness amount and the related tax impact.
Currently the American Institute of CPAs is fighting the IRS on the tax impact of Paycheck Protection Programs loan proceeds. Like everything else related to PPP, it could all change at any moment.
