Businesses That Accepted PPP Loans Could Face Big Tax Bills
According to the Small Business Administration, the federal Paycheck Protection Program (ended Aug. 8) issued more than five million forgivable loans to small companies, amounting to $525 billion.
While the citizens wait for another round of relief, the Senate bulked and failed to pass a bill that would have offered another round of PPP funding. Thats not even the worst part, neither the Senate nor the House has addressed a flaw within the program that could result in a huge tax bill for recipients.
While a company won't be taxed for the forgiveness of the loan, you also won't be able to deduct the expenses applied to obtain forgiveness of that loan.
Here is a hypothetical...
You received a $100,000 PPP loan, which you will seek to have forgiven with $100,000 of payroll and other eligible expenses. That’s great, except those $100,000 of expenses won’t be deductible. Which means you’ll have an extra $100,000 of income this year that you didn’t have last year. Many accountants and advisers are concerned that businesses will overlook this problem and will face a huge tax bill.
“Since cash flow was the primary priority for many of our clients, they weren’t as focused on whether the expenses would be deductible to the extent the portion of the PPP loans were forgiven,” said Jim Revels CPA, a Philadelphia-based partner in KPMG’s Private Enterprise Group.
Will Congress address this situation?
Maybe. Industry groups, including the American Institute of Certified Public Accountants have been lobbying for a fix, but no legislation to fix the problem is in the works.
Bob Casey, a Pennsylvania Democrat, said in a statement that he was “deeply disappointed” that the Republican majority in the Senate has not supported legislation to permit businesses to write off the expenses from their taxes.
But Pat Toomey, the Republican, said.
“Under the PPP program, however, as long as the loan is used for qualified expenses, its forgiveness is not treated as taxable income," the statement said. "Thus, an expense paid with a PPP loan costs a business nothing — the loan covers the expense and there is no tax on the loan forgiveness. It would not make sense for businesses to be able to deduct expenses they did not incur.”
Adrienne Straccione CPA, a partner at the Horsham-based accounting firm Wouch Maloney, says.
“If no action is taken, many business owners will be disappointed. Decisions were made, in part, based upon Congress' statement that loan forgiveness would not be included in income. Businesses could be forced to take out loans or find alternative sources of cash to pay the tax obligation.”
KPMG’s Revels agrees.
“Inaction, though, could potentially cause a wave of small and even mid-size businesses to be unable to pay their tax bills, their other expense bills, claim bankruptcy, close their doors, or — the worst-case scenario — all of the above,” he said.
Mitchell Gerstein CPA, a tax adviser at Isdaner & Co. in Bala Cynwyd, is advising affected clients to reduce taxable income. He suggests hiring more talent, making capital investments that leverage accelerated depreciation rules, or deferring income and accelerating expenses.