July 28, 2020
I read an interesting article in The Hill entitled
Thanks to the PPP, Small Business Owners Could Face a Huge Tax Bill This Year by Gene Marks. Published on July 23, the article focuses on the tax implications of the Payroll Protection Program (PPP) loan forgiveness. According to the IRS, a small business will not be taxed when a PPP loan is forgiven. Since the expenses used in the forgiveness calculation are not deductible profits could be overstated. These expenses include payroll, health insurance, retirement contributions, rent, utilities and mortgage interest.
Here is the example given by Marks which clearly illustrates the issue: “Let's suppose your business is one of those companies that have struggled this year with no growth but is still keeping things together. You had about $1 million in revenues in 2019 and – even though it's been tough – you believe that the economy will continue its recovery and you will wind up doing the same level of business in 2020. Let's also suppose that you received $300,000 of PPP money that helped pay for your employees and other expenses and you’re able to get full forgiveness for the loan. That forgiveness won't be taxable. But because the $300,000 won't be deductible, your profits will be $300,000 higher than last year. If you've only been paying in estimated taxes based on last year's profits, you're going to have a much bigger tax bill for 2020.”
Small business owners base their estimated taxes on year to date and historical results. Many may assume that a decline in sales this year will result in less profits and lower taxes. But that may not be the case because of the non-deductibility of PPP expenses. Marks recommends that business owners act now, so there will not be an issue at tax time.
While every situation is different, in a normal profitable year, you would look to defer income into next year and accelerate expenses into this year where possible. For example, you could make retirement plan contributions to defer income or take advantage of accelerated depreciation rules by purchasing equipment. Regardless, the goal is to reduce adjusted gross income (AGI) for 2020.
There is a chance that the IRS or Congress will enact legislation to allow the full deduction of forgivable PPP expenses. Until then, it is best to prepare for the possibility that this will not happen.
Stay safe,
David Gibbs, CPA, CCIFP, MBA
Partner
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
