As some small businesses are breathing a sigh of relief after finally receiving desperately needed small business bailout funds — in the form of the Paycheck Protection Program (PPP) — they are working diligently to record their expenses correctly so their loans will be forgiven. But, what of this “non-taxable” income?
We were promised that the loan forgiveness would not be taxed as income. The fly in the ointment appeared last week when the IRS announced that while the income is not taxable, the expenses associated are not deductible either. As a result, we are currently looking at the same result as if the funds had been taxed.
As an example:
As illustrated, there is no difference between taxing the income or not allowing the deduction. When the numbers above are included in your income statement, your business will be showing $100,000 more in taxable net profit.
We may see many more iterations of this program before all is said and done. We can only hope that our representatives will see the absurdity of these calculations and allow the deduction.
In the meantime, we are being conservative and encouraging our clients to do the same. Treat your forgivable loan as taxable and be prepared in advance of filing 2020 returns.
As a Profit First certified firm, we already have a separate bank account set up to pay our taxes. This separate bank account also can be for potential PPP loan taxes you might owe. We encourage you to be aware that your PPP loan could be taxed based on the current law. That’s why we recommend using this separate account to also set aside up to 15 percent of your PPP loan from other revenue you might have. If you can’t set aside 15 percent of your PPP loan, set aside what you can so you are as prepared as possible.
This is a simple step and will provide peace of mind. If you cannot put 15 percent aside, start with something. When business picks up, you can add more. If the IRS ruling changes, this is still your money; you will be that much more ahead. You are determined to weather this storm. Don’t let the tax burden be the straw that breaks your back.
If you have questions regarding setting up your tax account, feel free to email me to set up a time to chat. We are in this business because we value entrepreneurship. This may be one small way to help.
Ruth Urban is president and CEO of On the Money, LLC, a Phoenix-based firm specializing in small business accounting, bookkeeping management and profitability consulting. On the Money’s mission is to help small business owners take control of their finances by creating systems and tracking tools, then teaching them how to use those tools to make better-informed and more profitable money decisions. We also offer PPP tracking consulting packages to support your business in navigating this program with the goal of loan forgiveness.
