To our Valued Clients and Friends,
You may have read one of the many headlines which represent the forgiveness of the Payroll Protection Program (PPP) loans is not taxable. While this statement is technically truthful, it is not the whole story. We have received more information in the last few months that the Internal Revenue Service (IRS) will be interpreting the law such that PPP loan forgiveness is taxable.
HOW DOES THIS WORK?
Generally, when debts are forgiven it is taxable income to the debtor. The law clearly states that the PPP loan forgiveness is not taxable income. However, the IRS is interpreting the law such that expenses paid with the forgiven loan proceeds are not deductible expenses for tax purposes.
Less deductible expense has the same tax effect as increased income.
Let’s look at an example:
You received a $100,000.00 PPP loan and spent all the proceeds on qualified expenses. Your bookkeeping records indicate your net income for the year is $150,000.00.
Net Income per Books $150,000
PPP Expenses Not Deductible for Tax 100,000
Taxable Income $250,000
This is the same effect as if you were taxed on the loan forgiveness:
Net Income per Books $150,000
PPP Loan Forgiveness 100,000
Taxable Income $250,000
WHAT SHOULD YOU DO?
You need to make sure you have taken this tax impact into account for your 2020 year-end planning! If you have a PPP loan, that will likely be forgiven, we need to be sure you are planning for the additional income for tax purposes.
Please call us if you have any questions about how this will affect your tax situation for 2020 and beyond.
OTHER QUESTIONS?
Do you have other questions on your PPP loan? Do you need help with the forgiveness paperwork from the bank? Do you need help determining the eligible expenses and the appropriate timeframes? Do you want help determining if you should apply for forgiveness?
We can help with these things, so please reach out as soon as possible!
Wishing You Continued Health & Safety,
Maeda Palius, Jason Janzen and Annika Jensen