What a year 2020 was, and so far, 2021 has been quite exciting as well. For business owners, we finally have some excellent news about PPP Loan forgiveness.
After some confusion over the past year, we finally have some clarity to the question of whether business owners who took PPP Loans will be able to deduct the eligible expenses, which allowed for the loans to be forgiven. The Internal Revenue Service (IRS) and the Treasury Department released guidance last Wednesday on who can claim deductions for expenses associated with Paycheck Protection Program loans that have been forgiven. The clarification is great news for anyone who received a PPP loan last year.
The tax guidance in Revenue Ruling 2021-02 also reverses previous guidance issued last year by the IRS and the Treasury when, for some reason, soon to be former Treasury Secretary Steven Mnuchin cruelly opposed the ability of struggling small business owners to deduct expenses related to the forgiveness of PPP loans. A wide variety of Trade Industry groups, including the American Institute of CPAs, campaigned for the ability to write off these business expenses. To paraphrase, these groups generally were arguing that making these expenses tax-deductible would expand the helping hand of the PPP Loans for struggling businesses. Furthermore, this was in line with congressional intent when the CARES Act was passed last year, setting up the PPP loans as a way to get money quickly into the hands of desperate business owners and the self-employed. The latest Coronavirus relief bill included a provision that allows the expenses to be deductible and revives the PPP as well as creating a new pool of $284 billion in funding for future PPP loans. This change will allow expenses related to seeking forgiveness of the Small Business Administration-backed loans to be deducted by businesses that received said loans. In plain English, this makes the PPP Loans more valuable for business owners.
This new revenue ruling supersedes the previous guidance from the IRS and Treasury, which state that PPP loan forgiveness expense could not be deducted.
What Does This Mean For Your Year-End Tax Planning?
A few of you reading this have probably already had your PPP Loans forgiven. Most of my financial planning clients who have PPP loans have not yet had them forgiven at this time. Regardless, this clarification from the IRS will allow us to revisit their tax assumptions for 2020. This could include things like how much the business expects to contribute to its Profit Sharing Plans and Cash Balance Pension Plans for the 2020 tax year. For others, this may change the amount of their estimated tax payments due in 2021.
The bottom line for business owners is this a huge win. Depending on the profitability of the business, allowing these tax deductions expands the value of each PPP loan by somewhere between 10-37%, at the federal level. For some businesses on the verge of shutting down, this additional lifeline could be the thing that helps keep the doors open. In other cases, this may allow the business owners to bring back some staff or avoid a further round of layoffs. Yes, in other cases, this will just put more money back into the pockets of business owners who are otherwise doing well.
Work with your tax professional and certified financial planner to figure out what this IRS change means for you and your taxes.