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The IRS recently issued a ruling denying Paycheck Protection Program (PPP) tax deductions even if your loan might be forgiven in the future. TGG Founder & CEO, Matt Garrett and one of TGG’s CFOs, Bonnie Howard led a TGG Bonfire Chat webinar where they broke down what this means for your business. Here are the top 10 takeaways.
Update 1/4/2021: On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. Section 276 of the Act reverses the prior Internal Revenue Service guidance and provides significant tax relief to all PPP borrowers. Not only does the Act confirm that any cancellation of debt income obtained from forgiveness of the PPP loan is tax exempt (as provided for in the CARES Act), but now any tax deductible expenses used to generate such forgiveness may still be taken to reduce taxable income.
1. The PPP Loan is Taxable: The IRS issued a ruling that whether or not you applied for PPP Loan forgiveness in 2020, if you can reasonably expect forgiveness on your loan, the expenses that are going to be forgiven are not tax deductible. Previously, we understood it as these expenses would not be tax deductible if you had applied and received a decision on PPP forgiveness, now it doesn’t matter if you’ve applied.
2. Loan Forgiveness is Still the Best Option: You still want to get forgiveness on your PPP loan. For example, if you received a $100k loan and if you apply for forgiveness, assuming an effective tax rate of 30 percent, you’d be paying $30k on the loan. If you choose to not apply for forgiveness, you’ll take on the debt and pay out the $100k meaning that’s $70k more if you’re not applying for forgiveness. The worst-case scenario would be to take on the debt.
3. Start Planning Today: Determine your projected 2020 taxable income. You need to do this first to have a baseline understanding of how the addition of PPP expenses will impact your taxable income. Secondly, you need to understand how much cash you have available today to be able to cover that potential increase or new tax liability.
4. Take Advantage of CARES Act Tax Savings for Immediate Refunds: Check out the other favorable tax provisions in the CARES Act. This includes modified rules on net operating losses (NOL) carrybacks where the CARES Act allows you to carry back losses five years. You can do this for tax years 2018, 2019 and 2020. Another favorable provision is allowing companies to take 100% of the excess corporate alternative minimum tax (AMT) which was previously capped at 50%.
5. The IRS Ruling Provides a Safe Harbor: If you applied for forgiveness and only receive partial forgiveness, then the expenses you can’t deduct are only going to be for the amount that is forgiven. This means that if you only receive partial forgiveness, there is a Safe Harbor so you won’t have to pay tax on the covered expenses that aren’t forgiven.
6. Understand Tax Filing Deadlines:
- January 15, 2021: Estimated Q4 tax payments owed are due
- March 15, 2021: Partnership and S Corp returns are due (you can file an extension to September 15, 2021)
- April 15, 2021 – Individual & C Corp returns due
- September 15, 2021 – Partnership & S Corp extensions due
- October 15, 2021 – C Corp extensions due
7. Considerations for Sole Proprietors: If you’re a sole proprietor, you should be thinking about the ways that you distributed the money back to yourself. If you transfer it as a distribution to yourself then that is going to be a distribution and not an expense to the business.
8. Book vs. Tax Accounting Treatment: When you received the PPP funds, you should have put it on your books as a loan. If you’ve spent the money on covered funds and expect forgiveness you can relieve the debt and recognize Other Income. Do no modify the expenses on the books to match the tax return. These will be adjusted during tax preparation and documented as a book versus tax difference.
9. Other CARES Act Tax Savings – Interest & Depreciation: The CARES Act also now allows deducting interest up to 50% of your adjusted taxable income. Before you could only deduct up to 30% so if you have a significant interest expense, you can now deduct more of that expense. In addition, the CARES Act allows you to take bonus depreciation on qualified improvement property, a type of capital expenditure, where you’re making improvements to the interior of your office. You can go back to 2018 and 2019 and take accelerated depreciation on that which previously wasn’t allowed.
10. Cash is King: Understanding your current cash position and forecast over the next 13 weeks is a best practice and critical for tax planning purposes. TGG offers a Cash Flow Forecaster so you can have a clear picture of the health and safety of your business.
Lastly, make sure to file for PPP forgiveness as soon as possible because whether you file or not, the expenses are non-deductible, so you want to know sooner rather than later. For more information regarding PPP loan forgiveness, check out our full TGG Bonfire Chat with TGG Founder & CEO, Matt Garrett along with one of our CFOs, Bonnie Howard. Click to watch now!
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
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