This year’s Paycheck Protection Program (PPP) was a life preserver for many companies and for-profit organizations, as well as their employees, as the COVID-19 pandemic ramped up and businesses were forced to close. But there are some potential tax considerations for business owners and pass-through entities regarding the loan program created by the CARES Act, as well as possible new developments that could change the entire landscape.
Currently, the Internal Revenue Service’s (IRS) stance is that expenses covered by PPP loans are not deductible for tax purposes. That means if a company believes their PPP loan will be forgiven, they cannot deduct the expenses on their tax return in 2020. This could lead to an unexpected tax increase for many of the millions of companies who received PPP loans.
Congress, however, may soon provide a legislative solution to this problem with an upcoming stimulus package that includes language making these expenses tax-deductible. The stimulus could also allow companies with loans of $150,000 or less to use a simplified forgiveness form, increasing the current threshold from $50,000.
Additionally, under this potential package, smaller businesses that have had a difficult year may be eligible for a new round of PPP funds. One version of the legislation would include $288 billion in loans for businesses that have fewer than 300 employees and have experienced a 25% to 35% reduction in revenue.
While we wait in a limbo for a potential stimulus that throws business owners another life preserver, it is not wise to let tax concerns wait. These are strategies to consider:
- All business owners and pass-through entities should ensure their withholdings or estimated payments meet safe harbor requirements to avoid penalties and interest that could be caused by an unexpected spike in taxable income.
- Owners of pass-through entities that are postsecondary education institutions may need to take distributions from the institution to cover their personal safe harbor requirements. This action can be completed at any time until January 15, but we recommend waiting until after December 31 to do so. The reduction in equity caused by the distribution could materially impact the institution’s composite score.
No matter your situation, if you are the owner of an entity that received a PPP loan but has not recorded loan forgiveness, you should be reaching out to a tax advisor. Address this issue now.
For more on PPP, its tax implications, loan forgiveness and more, reach out to the experts at McClintock & Associates.