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Thursday, 21 May 2020 18:38

PPP Borrowers: The Gleam is Off and Beware the Taxman Cometh

Written by Kent Carlson


When the Paycheck Protection Program was announced as a part of the CARES Act in late March, the general consensus among small business owners was that this sounded too good to be true.

The original demand for these funds overwhelmed banks and the SBA and many businesses were left without loans when funding was exhausted in less than two weeks.


Congress quickly refunded the program. But despite the pent-up demand, estimates the funding would also be exhausted very quickly, and the banks and SBA being more prepared to handle requests, there remains about $130 billion in funds available three weeks after businesses could begin applying. Why?




Over the past several weeks, the SBA and Treasury have flip-flopped in providing guidance on the most basic of issues---who qualifies for this program?


While attempting to dissuade large, valuable public companies from using the program, they overreached and issued unclear guidance that led many small, private companies, the very companies Congress specifically intended to help, to question whether they would get into trouble by participating. After leaving these businesses in the dark for more than two weeks, the SBA and Treasury finally came out with guidance that reassured borrowers who had received loans of less than $2 million they would be deemed to have had the economic need necessary to qualify for the program.


The SBA and Treasury were also unable to provide guidance on how businesses could apply for and how the amount of forgiveness would be determined until this past week, six weeks to the day since the program went live.


In the meantime, businesses that were among the first to receive approval of their PPP loans have had to make many decisions without adequate information, as they are quickly running out of time to spend the funds to qualify for loan forgiveness. And while the Loan Forgiveness Application answers some questions, by no means does it answer all, which will leave borrowers where they have found themselves often over the past two months---confused and frustrated.

We can hope that more questions will be answered and the answers will be more complete in the days ahead, but they may come too late for many businesses to take steps to maximize their loan forgiveness. The continuing uncertainty and the missteps the SBA and Treasury have made in overseeing this program are likely contributing to the current lack of interest being shown in this program which, at one time, had businesses scrambling to participate.



The IRS recently weighed in with some guidance of its own that will likely not be welcomed by borrowers. The CARES Act specifies any amount of loan forgiveness will be excluded from gross income. This led many, if not most, of the businesses applying for the PPP loan to believe these funds would be tax-free.


With IRS Notice 2020-321, issued April 30, the IRS pulled an end-around. While acknowledging any amounts forgiven would not be treated as taxable income, it also announced any expenses paid for with those funds would not be tax deductible. Basically, it said, since it wasn’t the business's money paying those expenses, the business should not get to deduct them from its income for tax purposes.


While this may be technically an appropriate stance for the IRS to take, it seems to go directly against the intent of those who drafted the law. This has been borne out in subsequent days as a number of congressmen and senators from both parties have expressed opposition to this IRS notice, and bills have been presented in both the House and the Senate to restore the tax deductibility of expenses paid with funds that are forgiven.


Unfortunately, these bills have not become law yet, which leaves business owners wondering if they will have a large tax bill due as a result of participating in the PPP. For example, assume the owner of an S-Corp received a $250,000 PPP loan, which was subsequently forgiven in whole. If this owner has a personal tax rate of 30%, the owner’s taxes will increase by $75,000 (i.e., $250,000 x 30%) as a result of not being able to deduct the $250,000 in expenses paid for with the PPP funds.


Unless Congress acts, the tax impact will be sizeable. And since the news about this did not come from the SBA or Treasury, the usual sources of updates on the PPP, it may also be unexpected when business owners prepare their taxes for 2020.




While the PPP is providing a lifeline to many businesses during this pandemic, some of its luster has undoubtedly rubbed off due to questions about who it is designed to help and uncertainty related to having the loans forgiven. And now, even the taxman has arrived.


1IRS Notice 2020-32 can be found here.


Kent Carlson, the founder of Ad Meliora Consulting, has more than two decades of experience assisting body shops with moving "toward better." To contact him, call (847) 372-0527 or email him at kent@admeliora.org. For information on an upcoming webinar in which Kent discusses this topic, visit collisionresourcesinc.com.

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