When the U.S. Congress passed the original CARES Act, its intent was clear: it was meant to help both individuals and businesses in the face of the coronavirus crisis. The forgivable PPP loans were meant to help business owners and the self-employed to quickly access much-needed cash. But since that time there has been significant confusion as to exactly how helpful those loans would be in the face of tax guidance that indicated that the business expenses that the loans were meant to be used for could not be written off as deductions. Now there is good news that clears up the question and provides clarity about PPP Loan forgiveness and 2020 tax filing.
The Internal Revenue Service and the Treasury Department released guidance earlier in January that clears up the question of whether those who received Paycheck Protection Program loans that have been forgiven will be able to claim deductions for the allowed expenses that they used the loans for. According to Revenue Ruling 2021-02, the previously extended forgivable loans will be eligible for business deductions by those who received them, just as is the case for the $284 billion made available by the latest coronavirus relief bill. This decision upends the arguments that had previously been made by former Treasury Secretary Steven Mnuchin and validates the appeals that the American Institute of CPAs and other trade industry groups made in support of small business owners.
PPP loans were offered as forgivable as long as certain requirements were met, and though most business owners who applied for and received the loans have not yet completed that process, some have. When it seemed clear that having taken the loans precluded writing off business expenses, many businesses feared that they would end up having to close their businesses or forgo making contributions to Profit Sharing Plans and Cash Balance Pension Plans for the 2020 tax year.
Now, those owners will be able to apply more beneficial tax strategies, secure in the knowledge that they will be able to make lower estimated tax payments for next year. For some businesses, the difference between being able to write of those expenses and having the deduction taken away amounts to between a 10% and 37% difference in their federal taxes, and this amount is significant for businesses that have been walking a narrow path to remaining solvent. Being able to deduct those expenses from total income may mean the difference between keeping their employees or simply being able to show a bit of income for this difficult year. (CAUTION: These changes may not be the same for state tax purposes.)
If you need assistance in understanding how this decision applies to your business or in tax preparation, contact your tax professional today.
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
