As a small business owner, you likely view The Paycheck Protection Program as a crucial lifeline that’s helped you weather the ongoing Covid-19 pandemic.
As you know, PPP loans were designed to be forgiven, provided the loan proceeds were used for “eligible expenses” like payroll costs, rent, utilities and mortgage interest. While the forgiveness of the PPP loan is tax-free, new guidance issued by the IRS requires that business owners not deduct the eligible expenses in 2020. So, while a business owner may not have applied for PPP loan forgiveness just yet, if a business “reasonably believes” the loan will be forgiven in the future, costs funded with the loan are not deductible for 2020, according the IRS. In the November 18th release, Treasury Secretary Steven T. Mnuchin explained this clarification, citing that since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. “This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket,” said Mnuchin. According to this current update, you and your business can only take advantage of the expense deduction if your loan isn’t forgiven (and isn’t going to be forgiven). So, is all hope lost for this new guidance to be reversed? Not quite. One thing that lawmakers on both sides of the aisle seem to agree on, is that they disagree with this guidance. Currently, The Small Business Expense Protection Act of 2020 has bipartisan support. If passed – it will mean a significant difference to your 2020 taxes.
So what can you do?
At RBT, our firm is hard at work writing letters and sending them out to our representatives in Washington. We are requesting that they approve the proposed legislation (Senate (S.3612 sponsored by Senator Cornyn (R-TX) and House (H.R. 6821 sponsored by Representative Holding (R-NC) or H.R. 6754 sponsored by Representative Fletcher (D-TX)) to make eligible expenses that were forgiven deductible. We recommend you do the same. Click here for a list of NY senators and representatives you can email. To save time, please feel free to copy and paste the template below:
All Americans have been impacted by the COVID-19 pandemic, and your actions in Congress have provided much-needed relief to millions of struggling businesses. I am writing to you to ask you to continue the important work that will allow small business owners in my community to succeed.
I strongly encourage you to include in any year-end, must-pass legislation language that will allow millions of small business owners a tax deduction for expenses paid with Paycheck Protection Program (PPP) forgiven loans. Bills introduced in the Senate and in the House would ensure that PPP loan recipients are provided the full benefits intended in the CARES Act.
It is important for you to ensure the same businesses that have been struggling to survive while adhering to constantly fluctuating shutdowns are not also subject to additional and unexpected taxes as they continue to face an extraordinarily challenging financial year.
Passing this legislation as swiftly as possible will provide small business owners more confidence as they focus on business planning strategies to weather the pandemic.
As always, RBT is here to support the small businesses that make our community so vibrant and welcoming.
If you have specific questions pertaining to this latest IRS clarification, please do not hesitate to reach out for further discussion with one of our dedicated team members today.