This post originally covered IRS guidance that denied deductions for expenses paid with forgiven PPP funds. That guidance was later reversed by the 2021 Consolidated Appropriations Act, which allowed otherwise deductible expenses paid with forgiven PPP funds to remain deductible. 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 Earlier IRS Position Was Reversed: The original IRS guidance would have denied deductions for expenses paid with forgiven PPP funds when forgiveness was reasonably expected. Congress later reversed that position, and the IRS obsoleted the earlier guidance. PPP forgiveness is generally excluded from gross income, and otherwise deductible expenses paid with forgiven PPP funds may remain deductible.
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 provisions such as temporary NOL carrybacks and expanded interest deductibility were time-specific relief measures. Businesses should review current tax planning opportunities with a CPA before relying on those provisions. 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: The following deadlines applied to the 2020 tax year and are included here as historical context.
- 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.
If your business still has unresolved PPP forgiveness, repayment, or documentation issues, review them with your lender, CPA, or advisor. The lasting lesson is to keep clear records, understand tax treatment, and document how funding was used. 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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Sarah Lamond is a Consulting CFO with TGG. She focuses on improving company’s operating performance through strategic analysis of financial and other operating data. As a CFO, Sarah is responsible for developing financial and operational strategies as well as relying on metrics to maintain or improve business performance along with building relationships with clients. Her goal is to drive revenue and profitability for her clients while still providing insight, guidance, financial foresight and industry experience.