As of today, congress has yet to present legislation to repair the glaring taxation burden that has arisen as a result of the Payroll Protection Program loan forgiveness.
The tax code states that expense paid for from funds for which the business owner has no basis (meaning you have no obligation to repay or report as income) are not tax deductible. What this means to PPP loan participants is that when your loan is forgiven, the expenses that you paid are no longer tax deductible. For many, this will present a substantive and unintended tax burden.
The treasury department remains steadfast in its assertion that without legislation to create an exception, the expense paid with forgiven PPP funds will remain non-deductible.
From a planning standpoint, we are encouraging everyone to consider delaying the loan forgiveness application process until the end of the year which will ensure that the actual forgiveness occurs in 2021. If congress passes legislation before year end to fix this oversight, then there is no harm whatsoever. If they do not, it will give additional time to get this legislation passed in 2021 and avoid the potential burden on your 2020 business return filing.
We would think that if it is passed it will be retroactive back to 2020. However, we cannot guarantee that in fact occurs.
For now, if you do apply for forgiveness this year, you need to plan on paying a higher income tax burden than you would otherwise experience. It would be wise to consider your 2019 income tax top marginal bracket for federal and state income taxes, and multiply that by your loan amount. This would give you an approximation of the taxation cost that you could experience.
We will continue to keep you posted as we learn more on this matter.
Here is an article published yesterday that gives some additional insight.
PPP loans hide a hidden kicker: A big tax bill.