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Is There Really Such a Thing as Free Money?

by Kenneth Hrica, CPA May 04, 2020 | Share

Will the PPP Loan be the “Free Money” Everyone Thought it Was?

Small businesses who received a Payroll Protection Program (PPP) loans, may lose out on tax deductions. On April 30th, the IRS published a notice which ruled out deductions for wages, rent, and utilities paid with forgivable PPP loans.

“This treatment prevents a double tax benefit,” the agency said in the notice. “This conclusion is consistent with prior guidance of the IRS.”

While the CARES Act stated that the loan, designed to cover payroll costs, rent and utilities for eight weeks, is not subject to taxes, it failed to mention whether theses expenses could still be written off. This latest guidance is one more in a series of what seems like never ending changes in our understanding of the PPP.

Lawmakers, as well as taxpayers are not happy with this newly released policy, which diminishes the value of the loans for small businesses. They believe that this is not what Congress intended when it  created the program. While the ruling is consistent with how exemptions and deductions are normally handled, it seems to run contrary to the intent of Congress in the CARES Act.

“If the expenses are not deductible, then in effect they’re paying tax on this loan, which makes it worth less,” Ed Slott, founder of IRAhelp.com, said. “Losing a deduction is the same as being taxed on something.”

The intent of Congress was to provide small businesses with rescue funds without adverse tax consequences.  So, it will be interesting to see if Congress takes action against this announcement. Congress does have the power to override the IRS’ guidance, and early indications are that it may choose to do so.

So, what does this mean for your business?

As of right now, this ruling means that the cost of using your PPP funds will be higher than you likely anticipated.  If all or part of your PPP loan is forgiven, you will lose tax deductions on the business expenses you paid as directed by Congress and the SBA to make your PPP loan forgivable.

We will continue to keep you updated.

EIDL Loan Advances

Remember the $10,000 we were promised would be received in 3 days?  Applications for this loan advance, that was said would be treated as a grant, started being submitted back on March 27th. Over the last two weeks, this money finally started appearing in some of our client’s bank accounts.

There are two problems here.

First, of our clients that received money from the SBA, most of them didn’t receive $10,000.  The SBA decided they meant to say $1,000 per employee, up to $10,000.

Second, these funds were meant to be received as immediate relief, well in advance of any applications for PPP loans.  If you remember, the application asked you to take your monthly payroll cost, plus any existing EIDL loan you were eligible to refinance, less any loan advances received. For every single one of our clients, the amount of loan advances received was zero at the time of the PPP applications.

So, what does it matter?

That advance was supposed to be subtracted from the amount you could borrow.  Since it wasn’t, reports are now saying it will be subtracted from your eligible forgiveness amount.

The “free money” keeps getting less and less.

A Bit of Good News

Round two of the PPP loans began last Monday.  After a rocky first day full of technical glitches, 2.2 million loans were issued last week totaling $175 billion. New data shows that the disparities in approvals that occured during the first round have been largely eliminated and suggest many smaller businesses are getting loan approvals. We have seen this to be true of some of our own clients, who have finally received the funding they had been desperately waiting for.

We encourage you to stay positive during these troubling times, and most of all, we hope you and your family stay healthy.

About the Author

Kenneth Hrica, CPA

Ken Hrica joined Century Accounting & Financial Services full time in 1991, after working for several years in public accounting with Ernst & Young and acquiring his CPA license. With almost 35 years at Century, Ken has recently taken over the firm and its management. The value he brings to his clients lies in his vast experience, working with hundreds of individuals, businesses and non-profit organizations. Ken’s hands on approach includes getting new clients’ records up to date, helping new clients properly set up their books, assisting in making decisions on business structures, and payroll advice, such as should you issue a 1099 vs. a W-2. He advises all clients, new and long term, in many other financial areas of their business including tax planning and tax preparation. He also helps clients deal with the IRS, from back taxes to installment agreements.

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