• The PPP loan was created with the intention of being forgiven
  • What’s the catch? Forgiven funds are non-deductible

The Payroll Protection Program Loans were created earlier this year as an immediate response to COVID-19 relief, providing millions of small businesses with the financial assistance they desperately needed to survive the pandemic economy. The original intent of the loan was, and still is, for it to be forgiven for businesses who followed proper guidelines: dividing 60% of loan proceeds to payroll costs and 40% to overhead (rent, utilities, etc.). Those who followed the rules get forgiveness.

Sounds simple, right? There’s a catch.

As per the IRS notice from this spring, expenses paid for with forgiven loans are non-deductible for 2020 taxes. Typically, contractors will write off such expenses—payroll and overhead—as tax-deductible. So long as this IRS ruling stays in place, such costs are disallowed for deductibility. It’s a lose-lose that would leave small businesses with either a) unforgiven loan monies to repay or, b) higher tax rates.

The IRS put this ruling into place to prevent a double benefit: receiving both a forgiven loan and deductibility on said loan. The reality, however, is that most small businesses with forgiven loan monies will still be paying it back regardless through higher tax rates which, in some cases, would amount to even more than the original loan.

Questions, comments, or concerns? Give us a call at 516-541-6549 or visit our DSJCPA COVID-19 Information Center to stay up to date and speak with a member of our Coronavirus Response Team (CRT).

Sincerely,

Devin McQuillan
Associate, Creative Solutions

Contact:
516-541-6549 | Email

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