The Government Giveth…

11/23/2020

… and the Government Taketh Away.

Well, they don’t take that much in this situation but they do take more than we expected.

There were two items of interest last week.  The first was that talks about Stimulus Round Two started up again with no further details.  Nothing really new there.  The second was the IRS clarifying the tax impact of your PPP Loan.  I have linked the ruling and have also included a link to the AccountingToday article.  Essentially, they said that if you have a reasonable expectation of forgiveness, then the associated expenses may NOT be taken as a tax deduction.  So, it does not matter when you get your loan forgiven; what matters is if you expect it to be forgiven.  If so, then your 2020 tax return will be a little light on expenses.  HOWEVER… if you take it as a loan, then you can deduct the expenses. 

Getting into the weeds, let’s say you got a $200,000 PPP loan and you expect it to be forgiven.  In that situation, your expenses have dropped by $200,000 essentially increasing your taxable income by $200,000 in 2020.  This will generate additional tax of $40,000 based on a 20% tax rate (just to keep the math simple) and assuming the company was profitable.  In essence, you received $200,000 but will end up giving $40,000 of it back.  It seems an open-and-shut case that this will apply to your 2020 tax return unless Congress tells the IRS to pound sand.

And speaking of telling the IRS to pound sand… the two ranking Senators in the Senate Finance Committee were adamant that taxing the PPP loan was not the intent.  Consequently, I think this will be changed in short order.  However, it’s still 2020 – nothing is predictable.

In the meantime, not even Covid can stop the 4th Thursday in November from happening.  Who knew that Liberia celebrated Thanksgiving?   So have a wonderful Thanksgiving; there truly is much to be thankful for.