Thinking of being first in line to apply for PPP forgiveness? Maybe not the best idea.
- Any business that received PPP funds qualifies!
- You may have not considered potential consequences to receiving government aide. A tax professional will be needed to guide you through the processes.
- Who should you contact to get help while navigating the complexity of PPP loan, forgiveness, and tax implications?
If your company was one of the 700,000 plus businesses that took funds from the Payroll Protection Program (PPP) loan, you may have thought that the loan was your saving grace. But as we begin peeling back the layers of bureaucratic red tape, there are some very serious unintended consequences that could arise from the acceptance of PPP funds. I’m not in any way saying that companies should not try to access these funds to keep their business afloat; however, I do think that all business owners should educate themselves on the potential implications from accepting the loan and take the right steps to protect their small business.
Now that all the PPP funds are exhausted (for the time being at least) small business owners are quickly learning all of the caveats and requirements for the loan to be fully forgiven. The terms of the PPP loan require that a majority of the funds be allocated to payroll and rent/utilities. However, the actual percentage that was required to be spent on these expenses have changed since the inception of the CARES Act. There are many proponents and critics of this legislation that believe the percentage requirements for spending may be shifted or even nixed as the forgiveness applications start flooding in. This means that there could be a clear advantage to waiting until all the fine points for forgiveness are ironed out to submit your application as it could affect the amount of your loan that is forgiven.
Absent the ever-changing requirements there is also some very serious tax implications of forgiving the PPP loan. The CARES Act explicitly provides that all expenses that are paid with the PPP loan are not deductible on the annual business income tax return. So, let’s play out a scenario here: Let’s assume your small business took a PPP loan for $500,000 to cover all expenses during the COVID pandemic. All these funds were allocated toward the required expenses and your business has exercised the forgiveness clause and the PPP loan has been fully forgiven. Let us also assume that during the “covered time” your business saw a slight drop in income but still brought in $300,000 in gross receipts during this time. Since the PPP loan was used to fund all business expenses, the business is looking at a pretty large amount of profit to be taxed on. Typically, the business income is offset by business expenses to lower the amount of profit; however, since all the expenses were paid with forgiven PPP funds, the business cannot deduct any of these expenses. This is undoubtedly going to lead to some large tax bills for business owners who enjoy the benefit of pass-through income. As a business owner, it would be prudent to plan for the eventuality of a massive tax bill come 2021 if you decide to take this route.
There is another option, which may not seem as attractive when first considered. The CARES Act allows for the funds that were received to be treated as a very low interest loan that needs to be paid back. This might be a more attractive option for a business that did not experience a drastic drop in income during the COVID-19 Pandemic and would like to decrease the size of their tax bill at the end of the year. This would allow for the business to deduct all expenses incurred during the year and would simply add a line to the business balance sheet for a new liability.
This is not to say that forgiving the PPP loan may not be the best option for your small business, but I believe it is important to know all of the potential tax implications of forgiving the loan before exercising this option. When you were trying to access the PPP funds many business owners found it beneficial to get your application in as soon as possible to get your “piece of the pie” but when requesting forgiveness, the smarter play may be to wait it out and make sure it makes sense for you.
Adam Holleran, EA, JD
Timberline Tax Group, LLC
Keywords: Paycheck Protection Program, PPP, Stimulus, PPP Tax Deduction, CARES Act, Government Loan, Notice 2020-32