The Payroll Protection Program (PPP), created by the CARES Act, has helped many businesses survive this year’s chaotic twists and turns. Even better, according to the government, it’s forgivable and not taxable – but are there really any tax benefits associated with the PPP?
Although forgiven loans (which now become grants) are typically counted as taxable income, the CARES Act specifically excluded forgiven PPP loans from being included in gross income. However, an IRS ruling clarified that businesses cannot deduct the cost of wages or other expenses that were paid with the forgiven PPP grants.
Wait! Wasn’t the purpose of the PPP to cover payroll and eligible expenses, such as rent and utilities? Yes, and using the funds for those costs is the only way that it will be forgiven and convert from a loan into a grant, but according to the IRS’s interpretation of tax law, expenses used to qualify for forgiveness are not deductible on the borrower’s tax return, though these expenses can normally be deducted.
So, while your forgiven PPP is not taxable income, it cannot be deducted from your 2020 taxes since those expenses were not paid by your company (the government paid them). Without these deductions, there is a good chance that you will owe more taxes than expected. If you haven’t started your 2020 tax plan, you are already behind.
Worried about how PPP forgiveness will impact your 2020 business tax return? Grab a spot on my calendar. We will share the three most common mistakes we see business owners make when it comes to PPP loan forgiveness and exactly what you can do to avoid them.