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Don’t fall into the PPP tax trap

The Payroll Protection Program (PPP) has provided much needed relief for many businesses during these challenging times.  Most business owners are aware that money received from the PPP will not count as income.  However, many owners don’t realize that receiving this money may still have a negative impact on their tax return. 

As with many things, the government gives with one hand and takes away with the other.  While the money received will not be taxed as income, if the loan is forgiven then the expenses that the proceeds were used to pay are no longer deductible expenses for tax purposes.  

Let’s imagine that a small business received a $50K PPP loan and used those funds for eligible expenses like payroll, rent, or utility payments.  At the end of the year that business is showing $100K in income which includes a deduction for the $50K in expenses.  Once the loan has been forgiven the expenses will need to be removed from the profit and loss statement.  So where previously income had been $100K, now they would need to report $150K of income.  If the business owner is not aware of this requirement, it will create a potential cash flow issue when the taxes on that $150K are due. 

As such, any business owners that have received these PPP loans need their tax strategy to include the extra income generated by the non-deductible expenses.  Additionally, there are timing issues related to when those expenses will need to be removed for tax reporting purposes.  If you would like more information or help planning a tax strategy that will properly account for this, please feel free to reach out to us.