In recent months, there has been an ongoing national debate about the deductibility of business expenditures paid from the proceeds of a PPP loan. Why? Because the Treasury has recently announced, it will abide by the normal tax protocol on deductibility of expenditure paid out of the proceeds of a loan forgiven.
What do I mean? It is normal that a business is not allowed to double dip and receive a tax benefit from the same item twice. For me, as a tax expert, this is typical tax logic. Allow me briefly to explain the normal logic behind this. The theory is that a particular business expenditure, or even a personal expenditure, should not be a double tax benefit associated with one item.
What happened with the Paycheck Protection Program was that small businesses - and yes, some large businesses - were given free money from taxpayers, and that the money should go primarily to payroll to keep people busy during the coronavirus pandemic, but also to pay for some other necessary expenses to keep their business afloat. Well, this was structured as a loan, but the loan was forgivable, so it was free money. Most of the time, the IRS is required to collect income tax on those forgiven debts, but the original CARES Act, which created the PPP loan program, states that the IRS will not collect taxes on the forgiven amount of the loan.
Now that they cannot levy taxes on the enacted portion, the IRS came back and said the expenses paid with the enacted loan money could not be forgiven under the doctrine of not receiving a double tax benefit because that money was provided for free. By eliminating the deductions, the IRS eliminated the double tax advantage. It is simply logical that the tax deductibility that the company would normally have for the same business expenditure should not be allowed.
For me, as a tax expert, this is only logical. I take this for granted, but I fully understand how the wider small business community has been baffled by this.
They viewed it as a double whammy. The first blow came from the drop in revenue caused by the pandemic and orders to stay home. And now they are being told they cannot deduct their normal business expenses, which will lead to a higher tax bill - what money, some asked.
I fully understand where a small business owner would come from who is arguing against this measure.
But in the Omnibus Spending Act of December 21, 2020, which included this $900 billion pandemic relief package, Congress included a legal fix that directly suspended the normal protocol and reversed the IRS announcement. What Congress has done is to include it in the statute because it did not exist before - that the legislative intent of the original CARES Act was that there would be no change in the deductibility of the corporate expenditure paid for by the free money from the PPP loan. These are therefore aimed at the massive concerns of companies, especially as we are only a few months away from the due date for their business tax returns.
Again, although the expenditure was paid for by free money from the PPP loan, there is now a NO change in the deductibility of business expenditure. So if you are a small business owner and you are worried about it, that worry is now gone. The expenses you have paid with your PPP loan money will not change the way you deduct it.
It solves this whole problem. This is a big deal for small business owners, who face potentially huge tax burdens. The expenses you have paid with your PPP loan are fully deductible as normal operating expenses, and the loan will still be forgiven.
They have also included in the law a simplified procedure for writing off loans below $150,000. They also approved a second round of loans for small businesses that observed sales drop 25 percent or more due to the pandemic.
These are issues that are unlikely to receive nearly as much mainstream media attention as some of the bill's other provisions, including extending unemployment benefits.
But if you are a small business owner and are afraid of a potentially higher tax burden than you might have expected because some of these business expenses are not deductible, then don't worry any more because it is clear.
IMPORTANT: Our firm specializes in tax resolution. We serve clients virtually so don't hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm so we can schedule a confidential consultation to explain options to permanently resolve your tax problem. Make an appointment here! Or, call Toll-free 1-855-254-1892.
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