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If You Were Lucky Enough to Get a PPP Loan, You Could Be in for an Unpleasant Surprise at Tax Time


The Coronavirus Aid, Recovery, and Economic Security (CARES) Act of 2020 contains many sources of emergency funding for individuals and small businesses to help them survive the economic disruptions caused by the COVID-19 pandemic.  As with almost any source of funding for businesses, the money you can access through the CARES Act does not come completely free of obligations on the recipient’s part.  One of the provisions of the CARES Act is the Paycheck Protection Program (PPP), the purpose of which is to help small businesses keep workers employed in order to stem the tide of new unemployment claims.  While PPP funds are much less expensive than most small business loans, at least in the beginning, they can make you ineligible for some of the tax credits on which small businesses depend.  A small business lawyer can help you weigh the costs and benefits of applying for a PPP loan and make other important business decisions during the COVID-19 pandemic.

The New IRS Guidance Undermines the Paycheck Protection Program

The PPP offers small businesses a forgivable loan of up to $10 million that the businesses must use for payroll and other necessities such as utilities and rent.  The original language of the CARES Act made it sound like PPP loans would not count as taxable income.  In fact, one of the main goals of the CARES Act, and especially the Paycheck Protection Program, was to provide emergency funding to businesses without increasing their tax burden.

At first, the biggest problem with the PPP was that the funds disappeared too quickly.  Because the application process was so simple and perfunctory, some companies that were too big to be eligible took out PPP loans but later returned them.  Then, on April 30, right around the time Congress announced a second round of funding, the IRS issued new guidance about taxation for businesses that borrowed PPP loans.  According to the new IRS guidance, payroll payments funded through PPP loans would not count as expenses for tax purposes.  Therefore, small business owners would have to pay taxes on their PPP loan money which they used to process payroll, instead of deducting payroll as a business expense, like they normally do.

What do you do, then?  Can you afford to take out a PPP loan?  Can you renegotiate or eliminate some of your other expenses in order to afford your taxes?  Do you write to the Treasury to urge them to change the rule, as Bruce Willey of Yahoo Finance recommends?  Do you furlough your employees. because keeping them employed would be too expensive, even with a PPP loan?  Discussing your options with a small business attorney is an important step in the process.

Let Us Help You Today

The more complicated questions about business taxes require the expertise of a small business lawyer, not just an accountant or tax preparer.  Whether you decide to apply for a PPP loan or do without one, you will need a business law attorney’s advice.  Contact the Washington DC small business lawyers at Tobin O’Connor Concino P.C. for help today.




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