Oct 15

Oct 15 PPP Loans = Surprise Taxes for 2020 or 2021?

Disclaimer: Ultimately it is 100% up to your lender on forgiveness and most are being transparent in that we don’t have enough guidance on how exactly its going to work. I am not a lender and this blog does not serve as support in your ability for forgiveness. In addition, this blog is not to be used as tax advice or to support any financial decisions. Consult your tax professional.

Is the PPP taxable?

So…at the moment, yes its taxable once forgiven.

The Act says it’s not. But then the IRS says its not considered income but you can’t write off whatever you use it for…making it basically taxable.

What?

I know its confusing.

For example, let’s say you have:

Sales $100k

Expenses ($30k)

Net Income $70k

And you got $10k of PPP funds that you paid for rent and payroll that is included in the $30k expense line above.

The Act says - we will not add the $10k of PPP loans on top of your $100k sales number. Yay!

The IRS says - okay but you cannot include the 10k spent using PPP $$ in that expense number. Dropping the $30k in write offs down to $20k ($30k-$10k).

So now your activity looks like this:

Sales $100k

Expenses ($20k) *$30k expenses reduced by $10k PPP forgiveness

Net Income $80k

Thus, making the PPP taxable in the end.

Booooooooo.

Many people in Congress are irritated by this because the IRS went against their intent. However, besides discussion there has not been any changes in the laws to change this.

Personal Opinion: I think it will remain taxable. The IRS guidance is consistent with historic guidance and cases regarding nontaxable income and expenses. I think that it’s a discussion that’s on the backburner and may not change because the country is still bleeding and Congress is focusing on getting more funding out. Plus, we are just days until the election. Wah wahhhh.

The real question is…WHEN is it taxable?

The timing on all of this was not thought through very well.

The thing is, before applying for forgiveness its just a loan. While its a loan its not taxable because you are still on the hook for paying it back.

Once its forgiven its taxable. But how long could that take?

Well… the SBA gave us 10 months to just APPLY for forgiveness. Then it could take the lender 60 days to approve and the SBA 90 days to pay the lender. Once this is done its deemed forgiven.

But it could take LITERAL years to get forgiveness.

I did the math and even if you applied the day that you’re allowed to, it could still take almost a year to get forgiven from the date you received funds. Having this said, its quite possible you will not be forgiven in 2020. In fact it’s more than likely as we only have 2.5 months left in the year.

However, in the case you do get forgiven in 2020 - the treatment is simple: Your CPA would disallow the expenses you used with the PPP funds.

What happened to auto-forgiveness of loans under $150k?

This is part of the second stimulus package which is still be argued over right now. Totally unclear if they’ll come to a conclusion until after the election pushing it super close to the end of 2020.

If it does pass - I believe there will still be something to sign to formally apply for forgiveness. It’s a document saying you spent the funds the way you were supposed to. It still has to be submitted and there will still likely be some timing issues involved.

Even the new application for PPP loans under $50k?

Yes. Recently there was a simplified forgiveness application for loans under $50k here. It still comes with a timely process unfortunately.

Forgiveness in 2021…

The confusion lies here. If you don’t know you are forgiven (or for what amount) until well into 2021, what are you supposed to do on your 2020 return?

Do you still disallow those expenses assuming you’ll get forgiven?

What if you take the deductions but then later on the loan is forgiven?

Or perhaps you capture it somehow on the 2021 return.

All frustrating questions that make me want to scream a little.

These are unknowns. Once we know what we CAN do - us tax professionals can do some more planning.

How can we plan for this?

If you get together with your CPA for year end planning this should be something that’s addressed.

For the plans I’ve completed for my clients, I’ve done scenarios assuming the PPP will be taxable in 2020 and assuming it won’t be. That way you’ll know your best and worst case scenario.

Nothing worse than coming out of this entire thing to find yourself with a huge unknown tax bill.

In addition, many business owners will likely end up extending their returns in 2020 tax season to get confirmation of forgiveness.

Considerations for planning

There could be many reasons to want or not want this income to fall into 2021.

Deferring taxable income for cashflow purposes
Enough losses in 2020 to absorb the reduction in write offs
Expecting to be in a lower tax bracket in 2021 and wanting to recognize in that year

Estimated Tax Payments

Business owners who are required to pay estimates quarterly will have a tough time to determining the amounts if based on current year. This is because the PPP could make a large difference in taxable income for them.

But remember that estimates are based on 90% of current year or 100% of prior year. So if it makes sense to pay in based on prior year then you’re not going to incur interest or penalties as you’ll meet one of these qualifications.

Due to all of this, its important to continue discussing with your CPA on what’s best to do.