Author: Kyle Meissner
Because of its forgivable and generous nature, businesses nationwide quickly took advantage of Paycheck Protection Program (PPP) loans when they became available to help mitigate some of the financial toll of the COVID-19 pandemic. The program was meant by Congress to provide businesses with forgivable financial assistance during one of the most unprecedented and challenging economic conditions of the last 100 years. Businesses took these loans in order to keep their operations afloat and employees on payroll during a difficult time. Now, however, the realities of the potential tax implications of these loans are coming to light.
Borrowers who spend PPP loan proceeds on qualified expenses are not required to repay their loan. This is called cancellation of debt (COD) income, and is normally included in gross taxable income, but the CARES Act has excluded PPP loan COD income from taxable gross income. However, expenses such as payroll, rent, and utilities that would normally have been tax deductible against the borrower’s income, are currently not eligible for tax deduction for those who used PPP loan proceeds to pay for these expenses. So, regardless of the treatment of COD, borrowers end up in the same place.
Here’s an example to consider:
Normal : $10 income – $6 of expenses = $4 of taxable income
Without exclusion of COD income: $10 income +$3 forgivable PPP loan revenue – $6 expenses = $7 taxable income
Or with exclusion and expense disallowance: $10 income – $6 expenses+$3 worth of PPP loan expenses = $7 taxable income
Both scenarios result in a taxpayer paying tax on the loan amount of $3.
It is the position of the IRS that PPP loan borrowers should not be able to claim a double tax benefit, meaning they should not claim tax deductions on expenses paid for with PPP loan proceeds. Some are arguing that this goes against the intent of the program and there is movement in Congress to amend the treatment. In the meantime, it could mean that businesses will owe more in taxes than they normally pay in a given year, especially if they have large payrolls. In certain instances, it may prove better to delay seeking forgiveness of PPP loans in order to defer the increase to taxable income into a future tax year.
Please discuss your particular situation with your tax advisor. And if we can help, please contact any of the professionals from Cordell, Neher & Company, PLLC. at 509-663-1661.