Taxability of PPP Loan Forgiveness
As I write this in early July 2020, there is an 800-pound gorilla hanging out in the back of the PPP room that isn’t getting much attention these days. As things stand today, and despite the best efforts of Congress, the IRS has ruled that if a business receives a PPP loan and it is later forgiven, the expenses that the forgiven loan cover are not tax-deductible. You can read the fine print here.
Here is an example of how it works:
Assume your business has $500,000 in taxable revenue and $400,000 is business expenses that are tax-deductible leaving your business with $100,000 in taxable income. You would pay taxes on the $100,000. Assuming a 25% tax rate, you would pay $25,000 in taxes.
Now let’s assume all of your business expenses are eligible PPP expenses. You took out a PPP loan for $400,000, and that loan was eventually forgiven. The IRS has ruled that the $400,000 in loan forgiveness is not taxable income (that’s good), but now the $400,000 in business expenses are no longer tax-deductible (that’s bad). On the same $500,000 in taxable revenue, you would now pay taxes on the full $500,000. Assuming a 25% tax rate, you would pay $125,000
Now you owe an additional $100,000 in taxes!
Wait, what? What did I do?
Don’t blame yourself… this isn’t your fault. It isn’t even what Congress wanted. Nor does it mean that you shouldn’t have taken the PPP loan. You took it in April or May at a time when there was a lot of uncertainty about the future of your business and your employees. You took the loan on good faith, assuming you would have the loan forgiven. You did this to save your business and to keep your employees off of unemployment. But here we are now, a couple of months later and it will be catastrophic to your business if the loan isn’t forgiven.
There is still hope.
Congress passed the Heroes Act in May, and it looks like the Senate is finally ready to talk about additional stimulus in July. There is a provision in the Heroes Act (Section 20235 to be precise) that specifically addresses this topic and would make the expenses covered by the PPP tax-deductible. Let’s hope the Senate makes the right decision. If you’re concerned, talk to your Senator, it’s in their hands now.