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PPP Loan Forgiveness - Taxability

Re: Payroll Protection Loan Program (PPP)– Income Tax Impact



As you now have turned to the task of requesting the forgiveness of any PPP loan proceeds that were received from the SBA to assist in coping with the economic downturn, there are a number of questions which arise as to how those proceeds will be handled on the business income tax filings for this year 2020. 



1.        Will the proceeds be included as income by way of the fact guidelines do not allow the deduction for any expenses for which the money was supposed to be used (i.e. payroll, rents, utilities and certain other allowable and qualified expenditures)?  The current answer is, yes, the PPP loan will in essence be taxable business income; and as we are finding in many cases, it looks like this will result in additional business income tax burdens that will require both estimated tax payments and/or a final balance due on tax returns filed in early 2021.



2.       The next question is what the timing of this extra business income is resulting from the PPP loan proceeds.  Is the income considered to be earned when the SBA forgives the PPP loan (which most likely will be in year 2021), or is will this become income in this current year 2020 when the money was required to be spent?



We are finding there are absolutely no clear answers to either of these questions, as the actual legislative law was not specific on any of these matters.  The current thinking among the tax professionals, is, yes the PPP loan proceeds are in fact going to become income, and secondly, the income/removal of PPP covered expenses will be reported in the year of the proceeds/expenditures were expended, and not in the year of the forgiveness.  This means there will be higher earnings on your business in year 2020 rather than in year 2021 giving you much less time to prepare for any possible unforeseen tax liabilities.



Additionally, we are finding the general professional opinion is to file extensions on any business tax returns until there is adequate guidance issued by the SBA or legislative action taken to better clarify this mess.



So, the bottom line is as follows, as of this date, which is subject to change at any time.



1.       File an extension on all business tax returns to essentially buy time until greater clarification is available on the specific handling of the PPP loan proceeds and forgiveness taxation.



2.       Be prepared in any case for a higher tax liability in either 2020 or 2021 for the PPP loan proceeds to go towards the bottom-line income tax results.



3.       Make a 4th 2020 quarter estimated tax deposit to cover the potential tax liability.  If we find the guidance allows business to wait until the year of forgiveness (i.e. 2021 rather than 2020) then the overpayment resulting from the 4th quarter 2020 estimated tax deposit will be carried forward into year tax 2021.



4.       Hopefully, there is an outside chance the legislature will simply impose guidance to just forget the PPP loan as income/reducing expenses, meaning this whole mess goes behind us and has no tax affects.  Although, this would be best of all possible outcomes, we really need to consider all possible situations, particularly the first three actions noted above, should nothing here change.



5.       Please email us to let me know the total proceeds you received from the PPP Loan this year.  I know we may have this information, but I want to cross check the figures to be certain.



Newsletter Archive

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  1. Posted on: 2020-10-06
  2. Posted on: 2020-09-01
  3. Posted on: 2020-08-04
  4. Posted on: 2020-07-01
  5. Posted on: 2020-06-02
  6. Posted on: 2020-05-05
  7. Posted on: 2020-04-02
  8. Posted on: 2020-03-31
  9. Posted on: 2020-03-03
  10. Posted on: 2020-02-04
  11. Posted on: 2019-12-31
  12. Posted on: 2019-12-03
  13. Posted on: 2019-11-05