Tuesday, May 21

Preparing For The PPP Tax Apocalypse

You have unquestionably heard a lot about the Payroll Defense Program (PPP) in the news over the past several months.

The Federal Government, in my viewpoint, did a great task, pulling this defense program together within weeks of the pandemic countering in March and April. It was absolutely incredible.

The program was designed to assist the company owner to keep their individuals employed for eight continuous weeks. The idea was that 8 weeks would be enough time to bridge the pandemic issue and permit organizations to begin moving once again when it was over.

Then, the Federal Government understood 8 weeks wasn’t adequate enough, and though they didn’t provide additional financing, they permitted owners the liberty of utilizing their funds for payroll, lease, utilities, and home loan payments for a twenty-four week period.

If you have a $100K PPP loan, for instance, you utilized it correctly (maintaining staff member headcount, paying payroll, lease, energies, etc) and your bank accepted your grant application, you might possibly get 100% forgiveness on that $100,000.

There was a catch, though.

The guidelines currently state that the $100,000 that’s been forgiven is deemed to be non-taxable income, however, it appears that what you’ve utilized it on (paying income, rent, energies, etc) is a deduction which will now be prohibited.

Let me repeat that: Forgiveness, on one hand, disallowance of deductibility on the other.

We fear this will put many countless independent business owners in an extremely precarious situation.

For instance, if you own a $1M service, and your revenue is 10%, and included in that $100K profit was $100K in PPP funds you paid, as outlined in the PPP program, now, those payouts are no longer tax-deductible!

So, instead of paying tax on $100K in earnings at the end of the year, it appears, you will now be paying tax on $200K in profit!

Now, I don’t believe for a minute that the Federal Government’s intent was to produce this incredible vehicle to offer a grant, effectively turning the loan into totally free cash, and then on the flipside tax the heck out of you for it, however that appears to be the IRS’s position.

I have talked to numerous CPA companies and banks over the previous few months, and they have validated that my worry is exactly what seems to be occurring now with the Irs.

If the loan gets forgiven, the deduction is disallowed.

It’s going to send taxes through the roofing, putting a lot of small companies in substantial difficulty.

If you took advantage of the PPP, my advice is to start speaking with your banker and tax accountant NOW.

From your lender, find out what the last day is to get forgiveness, and when the first day of your loan payment is due.

Get your Certified Public Accountant to verify that the deductions are disallowed, and what that impact is going to look like to you on a tax-basis.

Then, if you can, postpone, delay, delay your grant application.

Keep delaying for as long as you can, because ultimately someone in Washington is going to awaken and realize the beast they have created and put their foot down with the IRS.

Any cash you pay back will be lost forever, so if there’s any chance of you keeping every valuable dollar in the bank, do so!