Many small businesses saw the CARES Act – especially the Paycheck Protection Program or PPP – as a gift. With the implementation of this program, there was suddenly a way to keep the business going in the face of a global pandemic, layoffs, and plunging bottom lines. Business owners took full advantage of the PPP, applying for the funding needed to keep business operations running at the most mission-critical level. While many companies kept only the minimum number of employees necessary to keep the virtual doors open, those people still needed to be paid. PPP loans gave business owners the means to do that, even when sales and revenues were going south.
But every silver lining seems to have a cloud these days, and now business owners who used PPP loans for payroll costs are faced with the prospect of a big tax bill at some point in the future.
Here’s What Happened
The PPP was rolled out so quickly that it seems no one really thought this through. Borrowers signed up for the program under the impression that PPP funding would not be taxable once the loan was forgiven. However, lawmakers did not specify whether the expenses that were paid with PPP funding would still be deductible or not.
On April 30, the IRS weighed in with their version of the truth – after more than three million small businesses had already received PPP loans. They decided to follow the policy already in place for untaxed funds, meaning that expenses paid with nontaxable income are not deductible.
How This Impacts Small Businesses
Since payroll taxes are usually a deductible expense, business owners who paid their employees with PPP funds are now likely to face larger tax bills than usual next year. While lawmakers are working to overturn this position, small businesses should start preparing now to manage their way through this next challenge.
Start Now So You’re Ready
Preparing your taxes can be complicated – especially when there are out-of-the-norm items such as pandemics and PPP loans to deal with. Getting ready for tax season shouldn’t be something you do the month before everything is due. Let Adams Accounting Solutions help you start preparing now for next year’s tax burden. We monitor what’s going with PPP loans, and we can help you navigate through it. Give us a call today!
