How Will the Paycheck Protection Program Affect Tax Liability for Small Businesses?

This year, many small businesses took advantage of financial relief packages to support them through the pandemic, including the federal Paycheck Protection Program, or PPP. Of the $660 billion paid out, approximately 75% of it went to small businesses to help cover payroll, mortgages, and other expenses. While this was a welcome relief for many business owners, they need to be aware of the tax implications of accepting these funds, and how Section 179 of the IRS tax code allows businesses to deduct qualifying equipment to limit tax liability in the current year.
First, there remains a lack of clarity about the availability of future pandemic relief funds. As of late November, there is widespread support from both the public and private sectors for a second stimulus package, but many of the details still need to be negotiated within Congress.
In the meantime, the IRS and the US Department of Treasury released two pieces of guidance as to how businesses’ taxes would be affected if they used the first round of PPP money. First, they stated that if a PPP loan has been forgiven, or the business reasonably believes it will be forgiven, any expenses covered by the loan money will not be tax-deductible. Second, PPP loan participants whose forgiveness has been fully or partially denied will be able to claim deductions on eligible payments.
There is bipartisan criticism of these new provisions. Senator Chuck Grassley (R-Iowa) and Senator Ron Wyden (D-Oregon) of the Senate Finance Committee released a joint statement, criticizing the IRS for exposing small businesses to increased tax liability. They argued that businesses who applied for PPP money were already struggling, and the inability to take normal small business deductions would further harm them. The Senators urged the Treasury to reconsider its position, but it remains uncertain if and how policies will change before the end of the year.
One avenue through which businesses can compensate for this increased exposure is through the Section 179 tax deduction. This deduction allows a business to write-off the full purchase price of a commercial vehicle in the year it is purchased, as opposed to following a gradual depreciation schedule. As long as the vehicle meets certain criteria and is put into service the year of purchase, it will qualify. For more information on how your business can take advantage of this deduction, visit our website: https://www.nitehawksweepers.com/tax-savings/.
Small businesses are encouraged to seek guidance from their tax professionals to learn how these new policies will affect their taxes and to explore alternative avenues of asset depreciation or other deductible expenses that could help absorb increased tax exposure.

Sources

Benincasa, Robert. 6 July, 2020. As Americans avoided restaurants and doctors’ offices, those businesses got loans. NPR. Available at https://www.npr.org/2020/07/06/887839065/as-americans-avoided-restaurants-and-doctors-offices-those-businesses-got-loans

Jeane, Jessica L. 18 Nov, 2020. Treasury, IRS Release Guidance on PPP Loan Deductibility. National Society of Accountants. Available at https://connect.nsacct.org/blogs/jessica-jeane1/2020/11/18/treasury-irs-release-guidance-on-ppp-loan-deductib.

Murphy, Shane. 24 Nov, 2020. Will you get a new $1,200 stimulus check by Christmas? Yahoo Finance. Available at https://finance.yahoo.com/news/second-1-200-stimulus-check-181500626.html

United States Senate Committee on Finance. 19 Nov, 2020. Grassley, Wyden: Treasury misses the mark on PPP loan expense deductibility guidance. Available at https://www.finance.senate.gov/chairmans-news/grassley-wyden-treasury-misses-the-mark-on-ppp-loan-expense-deductibility-guidance

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