Borrowers can elect to adhere to the 8-week period or the default 24-week period to spend PPP funds .
Forgiveness will be reduced if 40 percent or more of qualified expenses were applied to non-payroll expenses . In other words , at least 60 percent of the loan must be used for payroll expenses .
Forgiveness can be reduced if employees ’ salary or wage rates have been cut by more than 25 percent ( this does not apply to employees that made over $ 100,000 in 2019 ).
Forgiveness can be reduced if full-time equivalents were reduced — unless exceptions were met .
If you received an EIDL ( Economic Injury Disaster Loan ) advance of up to $ 10,000 , that amount will be reduced from your total forgiveness .
For example , let ’ s say your 2020 typical Profit and Loss looks like this ( without recording any adjustments for the PPP loan forgiveness ):
Profit and Loss per traditional bookkeeping :
$ 1,000,000 |
Collections |
-280,000 |
Wages paid to team |
-320,000 |
Other Expenses |
$ 400,000 Net Income to owner
Now let ’ s say that the business received a $ 58,000 PPP loan that was used entirely for PPP eligible payroll and will be fully forgiven . In this case , you would have to reduce the $ 280,000 wages expense by $ 58,000 when you file the tax return . Therefore , your taxable income will be $ 58,000 higher :
The following items qualify for loan forgiveness : Payroll costs including benefits
Owner ’ s compensation ( including owner ’ s compensation replacement ) for partners , sole proprietors , or owner-employees
Interest on mortgages and other personal property that were in effect prior to February 15 , 2020
Rent under lease agreements in force before February 15 , 2020 ( limited if self-rental )
Utility costs including electricity , gas , water , transportation , telephone and internet
Important 2020 tax considerations for expenses paid with PPP funds
While the PPP loan ’ s eventual forgiveness will not result in taxable income to the business ( typically loan forgiveness is taxable ), the IRS has stated that expenses paid with PPP loan forgiveness monies are not deductible to the business . This could result in higher than expected taxable income .
In late April , the IRS issued Notice 2020-32 that prevented PPP loan recipients from deducting business expenses paid using the PPP monies that gave rise to forgiveness ( defined payroll , rent , utilities , and interest ). This does not appear to be Congress ’ s intention when writing the bill , but this is the current IRS interpretation .
What this means is that your taxable income will probably be higher than your current Profit and Loss shows . Suppose you typically base your tax payments on the net income on your Profit and Loss statement . In that case , you need to make sure you include an adjustment to increase your taxable income by the amount of the PPP loan that will be forgiven .
Profit and Loss as will be reported on your tax return :
$ 1,000,000 Collections -222,000 Team wages paid
($ 58,000 less than your bookkeeping shows )
-320,000 Other Expenses
$ 458,000 Taxable Income to owner
At the 32 % tax bracket , this non-deductible amount would result in about $ 18,000 of additional tax over what was expected per the net income on your traditional bookkeeping Profit and Loss . While this may not be inherently unfair since you didn ’ t provide the cash to pay the $ 58,000 in wages in the first place , it does need to be considered so you don ’ t get a tax surprise of more taxable income that you expected when looking at your Profit and Loss statement .
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Jeramy is the founder of Jeramy Smith , CPA , PLLC , a boutique CPA firm focusing on serving Texas-based dental practices . With over 25 years as a Texas Certified Public Accountant , he has helped hundreds of clients with business strategies and tax-saving strategic planning . Contact Jeramy at jeramy @ planotaxteam . com . www . northtexasdentistry . com | NORTH TEXAS DENTISTRY 29