If you were one of the lucky recipients of the Paycheck Protection Program (PPP) or other CARES ACT funding you’ll want to hear what the IRS just said about deductions. This notice, which was brought to our attention 04/30/2020, clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.
What does this actually mean?
With this new notice, businesses cannot deduct expenses that were paid for using the PPP loan. The PPP loan can cover payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations. Next year, when filing 2020 taxes businesses cannot deduct any of the above-mentioned expenses that the PPP loan was covered. This new development will drastically change the tax strategy for your organization.
What can you do next?
Now more than ever it is important to keep track of your spending and have clean books. Not only will you be required to prove what you used your PPP loan for, in order to have parts (or all) of it forgiven, you will now need to keep track of those expenses for proper reporting on your taxes. This is not something you should wait to start. As we saw with the initial rollout of the PPP Loan and other CARES Act Loans, the early bird got the worm. Those with clean books from the get-go were able to make it to the top of the list before anyone else, while those who had to produce clean books were left out in the cold.
If you are someone who utilizes a tax strategy throughout the year, now is the time to make adjustments. Business owners should meet with their financial advisors now to change or start a tax strategy to adapt to the new changes. It is imperative to do this now rather than waiting for the end of the year when there is very little financial advisors can do to guide you. A tax strategy is not for sweeping up a mess after a fact, it is to prevent the mess in the first place. A tax strategy, regardless of the time, can be used to save you a large sum of money during tax season.
The “to long didn’t read”
According to the IRS, expenses paid for by the PPP or other CARE ACTS Loans are not deductible for your taxes in 2020. Expenses that can be paid for by the PPP include payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations.
In order to save yourself time, in the long run, you should work throughout the year to keep your books clean. You are required to prove what you used your funding for in order for it to be a forgivable loan and should also keep track of where the funding went for tax purposes later on.
You can utilize a tax strategy to find new deductions or other adjustments in order to save yourself money during tax season. If you have an existing tax strategy, now is the time to ask about changes.
Most importantly, as a business owner, you should be proactive during this time. Whether you got the PPP Loan or not, be proactive about keeping your books clean. Without clean books you may miss out on other funding opportunities or worse, you may not be able to withstand an audit.
To read this notice for yourself visit https://www.irs.gov/pub/irs-drop/n-20-32.pdf
To schedule, a tax strategy meeting click here