Firms with a Forgiven PPP Loan May Lose Tax Deductions

PPP Loan Forgiveness Creates Tax Issues

In normal business times, remember those days, if a company’s lender forgave a debt of at least $600, the company had to treat that as income. Also, in typical times, the IRS required lenders to report forgiven loans to the agency. 

Under normal rules, taxes on a forgiven Payroll Protection Program loan could really add up if a business borrowed a lot of money to stay afloat. Normal rules changed with the PPP. Under this lending program, the US government will cancel the business debt (via a grant) based on how many workers a business retains and the extent to which it reduces their salaries. Visit our previous post to learn more about the PPP program.

Please note: the IRS has not changed its policy on other forgiven debt. If your business negotiates cancellation of other debt (outside the PPP), such as credit card debt, you will incur tax liabilities on that forgiven debt.

In an announcement on September 22, the IRS announced that lenders do not need to report PPP loan-forgiveness to the agency. While this is good news for lessening paperwork, the IRS and Congress have not resolved one important issue: how to treat the expenses paid with PPP money.

Businesses May Lose Deductions

Here’s the fly in the ointment. While businesses do not need to report their PPP loan forgiveness as income, they also, currently, cannot deduct the covered expenses. The IRS is referring to this as a double tax benefit.

If a business cannot deduct these costs, its income will be higher and its tax bill will rise.

For example, let’s say a company borrowed $9 million under PPP to keep its employees on the payroll. That company could not now deduct payments to those employees as a business expense.  If this hypothetical firm is in the 50% tax bracket, it will now owe $4.5 million (as it cannot deduct the $9 million.)

Some members of Congress have introduced legislation to make these PPP-funded expenses deductible, but that legislation is not law at this time.

Some Delay Applying for Forgiveness

In August, the SBA allowed PPP borrowers to start applying for loan forgiveness. Due to the deductibility confusion, many firms have delayed applying for loan forgiveness.

Some banks are also delaying their PPP-loan forgiveness programs in the hope that Congress will address the problem.

How to Treat PPP Loan Forgiveness

You may have already applied for and received forgiveness for a PPP loan. When it comes to treating the PPP loan forgiveness from your lender, you have two options:

First, if you want to be conservative, pay an estimated tax to cover any taxes on the expenses you funded with a PPP loan. The conservative approach is also the safest path. This assumes you have the cash on hand to pay taxes.

Secondly, if you want to be aggressive, write-off the covered expenses as normal business deductions. Recognize that if you take this route now, you are taking a risk. If Congress does not fix this issue, business owners who attempt to write-off expenses covered by PPP loans may need to pay more in taxes.

If you need help navigating this complex tax issue, please contact us.

Posted in General Tax Tips & News, Small Business Accounting Tips

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