Understand how this affects your business and what you need to do.
Important information for anyone who has taken a PPP loan for their business.
As our government continues to write the law and language on how to handle the forgiveness portion of your PPP loan, we finally have a clearer idea of what it might look like, and it is not pretty.
At this moment, any forgiven portion of a PPP loan can technically increase your income since you may not be able to deduct the expenses that were or will be part of your forgiveness application.
Suppose your loan was forgiven or has the potential to be forgiven. In that case, we will not be able to use those same payroll, rent, and utility costs you used on your forgiveness application as an expense on your income statement and 2020 tax return.
This move by Congress may not affect our clients who struggled during the pandemic with significant dips in sales, but we fear it could potentially result in a sizable profit for those clients with little or no change in sales.
...we fear you could have the potential of a sizable profit for those clients with little or no change in sales.
Congress has yet to finalize or pass any rulings on it, but we need you to know the potential of what could happen as this year wraps up for most business clients on a calendar year.
This move by Congress circumvents the original intent for the PPP loan, which is upsetting.
Many tax associations have joined over 560 business and trade organizations urging Congress to pass legislation to allow companies that have received or will receive forgiveness on their PPP loans to be able to deduct expenses on their tax return. Accounting associations are also asking Congress and the SBA to simplify its questionnaire application for PPP loan forgiveness, which currently is a bit overwhelming.
If the final decision is that you cannot deduct expenses you were forgiven for or have the potential to be forgiven for, we will need to remove the expenses off your 2020 books and not include them on your tax return. This adjustment will be reflected on your 2020 tax return and books—regardless if you are forgiven for the loan in 2020 or 2021.
Since Congress has yet to decide, Pace Accounting recommends that you delay asking for forgiveness if you have not done so already and extend the processing of your corporate tax return if possible until Congress formalizes the law—this will also delay the filing of your personal income tax return for those clients structured as an LLC or S-Corporation.
...Pace Accounting recommends that you delay asking for forgiveness if you have not done so already and extend the processing of your corporate tax return if possible until Congress formalizes the law.
If your company has available funds, then we suggest paying off expenses before this year ends to help offset the potential of additional income due to the PPP expense removal. Pay your rent, utilities, legal and professional fees, or anything else you may be holding off can help minimize any potential increase in profits. Purchasing inventory will not help since it will only create an asset on your books if it remains as inventory by year's end.
If you have any concerns, please email your accountant or schedule a call.