PPP loan increases businesses taxable income, by Rolf Neuweiler, a2zCFO, (925) 216-5058 or email: rolf@a2zCFO.com

PPP Loans Affect 2020 Business Taxes

Though the forgiven portion of a PPP loan is non-taxable, taxable income is also higher since payroll and other expenses are not deductible.

The US Federal government doled out more than $500 billion forgivable PPP loans under the CARES Act to small businesses in order to help keep employees on payroll and pay for rent and utility expenses during the COVID19 pandemic. 

PPP loan, taxable income, payroll, and other expenses

The forgiven portion of the PPP loan is non-taxable, tax-exempt income. 

However, the forgiven portions of the PPP loans used for payroll and other expenses are not tax-deductible expenses, since the IRS does not allow doubling tax benefits. This may result in higher business taxes for businesses that took out PPP loans.

For example, a company with $100K revenue less $60K payroll would have $40K in profit normally would be taxed on $40k. 

If the same company took out a $15k PPP loan, assuming that the company fully recovered from a downturn, and further assuming that the $15K PPP loan was all used for payroll thus reducing the $60K payroll to $45K ($60k – $15K = $45K), the taxable income will be: $100k plus $0 ($15k forgiven debt income) less $45k = $55k. The taxable income with $15K of PPP loan is exactly $15K more.

 The company has $15k more cash from the PPP loan but taxable income is also higher.

Businesses need to discuss their PPP Loan with their accountants, tax advisors, and CFOs to know the specifics for each company’s financial position and tax liability.

Keep records and stay updated with new rules and regulations

SBA has a five-year statute of limitations to reassess its forgiveness, so keep good records to show the basis for your PPP loan and related expenses. Loans more than $2 million will be automatically reviewed by SBA. Also, It’s important to stay current about any new rules and regulation with the program.

A2ZCFO, both the Right and Left Arms for your organization

A2ZCFO takes pride in helping small business owners prepare for either storms or calm weather, and navigate safely through rough waters. As a consulting CFO, I help business owners and management to “keep your ship on course.”

We help with any aspect of financial management from A to Z. By providing trusted financial advice, I create financial and goal clarity, resulting in increases in cash, profitability and sales all the while preparing the business strategically for a successful exit when the time is right.

  • Works at client’s location and directly with client’s staff;
  • Affordable and flexibility in hours – 4 hours a month to short term full time assignment;  
  • Excels at messy and difficult clean up situations;
  • Meaningful financial reporting for management, bankers, and CPA’s.  Tax returns completed by due dates;
  • Cradle to grave services – from bootstrapped startups to exit transition service experience.

Please call me (925) 216-5058 or email:  rolf@a2zCFO.com

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A2Z CFO, we keep your ship on course.

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