Is My PPP Income Going to Be Taxed?

Unfortunately, there’s not a straightforward answer, yet.

Within the CARES Act, Congress says that PPP recipients whose loans are forgiven are not required to treat the income as taxable.

But the IRS says that expenses paid with PPP funds are not deductible. While not requiring you to pay income tax directly on the PPP money, this is a roundabout way of making sure you will pay taxes on it.

Wiping out the 20% QBI tax deduction and not allowing expenses paid with PPP funds to be deductible can bump you into a higher tax bracket, meaning you’ll pay more overall.

And the confusion around the issue is making tax planning a moving target.

Waiting on Congress…

Congress is pushing back on the IRS’s guidance on deductibility as “missing the mark”. Senate Finance Committee Chairman Chuck Grassley pushed back.

“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses. We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.”

Grassley went on to leave the door open for new legislation.

“While we continue our efforts to clarify in any end-of-year legislation the intended relief in the CARES Act, we have an opportunity to provide meaningful relief to small businesses at this critical time. We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most.”

This is promising news, but how do you plan for all of this?

Planning for PPP Tax

Hopefully by now you are forecasting 2020 taxes and optimizing owner pay. (If you’re not, or your accounting firm isn’t, we need to talk! Make an Appointment Today.)

But how do you go about accounting for the tax on PPP funds? It could be a big number.

Say your marginal tax rate is 35% and your PPP loan is $500,000. That’s $175,000 in additional tax you may need to budget for.

Most are not budgeting for this and it’s going to be a big surprise unless Congress steps in. What should you do?

First – make sure you have Safe Harbor tax payments in for 2020.

IRS Safe Harbor tax payments allow you to pay as little as possible by January 15th, without incurring unnecessary penalties. It’s the IRS’s way of proving to them you have made a best attempt in estimating and paying in taxes.

To qualify IRS Safe Harbor Rules as a business owner, you must pay quarterly estimated tax payments throughout the year. The payments that allow you to qualify as Safe Harbor payments are due by January 15, 2021.

Safe Harbor Amounts

  • 90% of the tax due for the current year
  • or 110% of the tax due in the prior year

If you are not a client of Agency CPAs, please check with your tax preparer that these payments are being made.

If the IRS wins and the money becomes taxable, PPP will be a significant increase to your taxable income. If you used the 90% rule and didn’t include PPP in your taxable income, you could be in for a rude awakening come April 15th.

By April 15th, we expect there to be agreed-upon guidance on PPP taxability. If PPP is deemed to be taxable, you can then go pay any additional tax by April 15th, avoiding IRS penalties and holding onto your money while Congress and the IRS fight it out.

Planning for all of this can be difficult, especially when they keep changing the rules. Make sure you have the right partners that can guide you through the ever-changing tax landscape.

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