As we head toward the end of the year, there are a lot of questions out there about PPP loan forgiveness. Let’s go back to the beginning -
The Paycheck Protection Program (PPP) was part of the CARES Act that was passed to offer economic relief in the wake of shutdowns caused by the COVID-19 pandemic. The PPP program itself was seen to be a lifeline for businesses as it helped provide cash flow to those that saw a decrease in revenue, shut down of business operations, and other effects of the pandemic. It offered loans with funds that could be forgiven. To be forgiven, a portion of the money was to be used for payroll expenses, but beyond that it could be used for rents, utilities, and interest on pre-existing debt.
Of course, things got a little messy from there as the rules and logistics were worked out. The payroll-related requirements loosened, but then some benefits paid for employees were forgivable, with restrictions on owner pay. We also learned that rents paid to third parties are forgivable but not the same amounts if paid to owners or related LLCs except for mortgage interest. Then there was the decision that while PPP money that was forgiven is not taxable, expenses paid with those funds will not be deductible.
Currently, the SBA has opened the forgiveness application and some businesses should start to apply for that forgiveness. The question is who should apply now and who should wait?
If your tax picture will not change if your expenses paid with PPP funds became non-deductible, you may want to apply now. This could include sole proprietors (who file their taxes on a Schedule C) with no employees, nonprofit organizations, and C-corporations with operating loss carryforwards.
If you are a sole proprietor with no employees, your deduction for expenses will be largely unaffected by forgiveness. Owner draws are “payroll” for PPP purposes but are not a business deduction and the expense portion of the forgiveness calculation is probably small or nonexistent. As for nonprofits, they do not have any federal tax liability. C-Corps with operating losses have to make a calculation to ensure advantageous timing, but when correctly done, forgiveness won't affect the tax liability.
Waiting to File
If you are not in those three categories – including S-Corporations, Sole Proprietors with employees, Partnerships, and C-Corps with profit - you may want to wait until Congress acts on the deductibility of the PPP expenses so that you will have an opportunity to maximize those for both forgiveness and tax liability. You have many, many more months to apply for forgiveness, so the deadline is no reason to rush. You will want to speak with your tax preparer (not just your payroll company) to see what they recommend, as well.
If you need help deciding which group you belong to, please do not hesitate to contact us and let us know how we can help.
To ensure we don't make the folks at the IRS ornery, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.