28 Sep PPP Loan Forgiveness Tax – Plan For This Now
As of today, September 28, 2020, the amount of business PPP loans that are forgiven are taxable.
For federal purposes, PPP loan forgiveness may be excluded from gross income. However, the IRS issued “Notice 2020-32” in April 2020 stated that the expenses directly associated with the tax-free income (essentially the expenses used in the forgiveness calculations) are nondeductible. This guidance is similar to previous guidance by the IRS regarding the nontaxable income and related expenses tax treatment. Unfortunately, however, this basically reverses the tax-free benefit of the exclusion on the loan forgiveness. The business expenses used in the PPP forgiveness calculation are excluded from the businesses expenses for tax purposes, thus, increasing the profit of the business and increasing the tax that is on the profitability of a business.
While the IRS guidance doesn’t appear to align with Congress’s expressed intention of maximizing the financial benefit of small businesses with the PPP forgiven funds, there has not yet been a law to change this. Congress has only been in discussion to do so, and other associations have been reaching out to the IRS to fix this taxable impact of the PPP loan forgiveness.
Business owners should take time now to speak to their tax accountants, or to our tax team at Unbehagen Advisors, about this ahead of this tax season. Business tax planning should be done, and especially in this case, in order to manage cash flow, and to make sure that underpayment of taxes do not create penalties and interest.
We are hopeful, as are our many small business clients at Unbehagen Advisors, that this tax treatment of PPP forgiveness will be reversed. However, we can only plan based on the tax laws that are in place today, and we encourage our small business clients to plan and be ready now if this tax treatment does not change.
Moreover, we are hopeful that this will all wrap up in 2020, with the final PPP forgiveness being in this year. If it runs into 2021, then this could complicate tax matters for small businesses even more by delaying this issue into next year.
Check back to our blog and website often. Please reach out to us if you have specific questions regarding this and how it may impact your business. This PPP loan and CARES Act stimulus information is still changing often. We have been keeping a close eye on this for our valued small business tax, accounting, bookkeeping, payroll and insurance clients.
Have a great fourth quarter to 2020!