By now most of you have heard of the Payroll Protection Program (PPP), and I am sure many of you have taken advantage of this great opportunity. However, there are a few things you need to know about how these loans are going to affect your taxes.
You probably know these loans will be forgiven if the loan proceeds are used for the purposes outlined by the government. Sounds like a great deal, right? Tax free money from the government!
Not so fast. Although it is technically true the loan forgiveness income is not taxable, what you may not know is the expenses you paid with the PPP funds are NON-DEDUCTIBLE. Let me say it again, any qualifying expenses you paid with PPP funds are NON-DEDUCTIBLE for tax purposes. (As of the date of this article)
For example, let’s say you received $80,000 in a PPP loan. Through June, say your business had gross income of $100,000 and expenses of ($150,000), resulting in a loss of ($50,000), so no tax due.
However, included in your expenses were ($80,000) of payroll which was paid for with PPP funds. This ($80,000) is NON-DEDUCTIBLE, so your tax-deductible expenses are only ($70,000) (original $150,000 less the $80,000 non-deductible). You now have $30,000 of taxable income.
Estimate Federal Income Taxes at 20%, and you owe $6,000 in Federal Taxes, and an estimate of 5% for State Income Taxes, you now owe $1,500, in State taxes. In this scenario, the tax free PPP money resulted in a total increase in taxes of $7,500 ($6,000 Federal and $1,500 State).
The previous calculation is just an example, and EVERYONE’s situation will be different. A worst case scenario on the above $80,000 PPP loan, all of the expenses paid could be taxable and an estimate of 20% Federal Income Taxes you would owe $16,000 and an estimate of 5% State Income Taxes you would owe $4,000 in State Taxes, for a total tax liability of $20,000 on your tax free PPP loan forgiveness!
Key take away—before you spend all of your PPP money, consult with your tax advisor and see if you are going to owe additional taxes. If you will owe additional taxes, consider making an estimated tax payment with whatever PPP cash you may have left before you are out of cash and have a large tax bill.
If you need assistance or need information regarding PPP loans, the related forgiveness and tax implications, please come see us at Meinershagen & Co.
To learn more about Meinershagen & Co., visit their website at www.mccpa.com.