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How does a forgiven Paycheck Protection Program (PPP) loan affect my taxes?

Clarifying Questions

Q: How does a forgiven Paycheck Protection Program (PPP) loan affect my taxes?
–Curious Business Owner

A: Dear Curious:

The CARES Act specifies that a forgiven PPP loan isn’t considered taxable income, so you won’t have to pay any federal income tax on it. However, some states may end up requiring you to pay taxes on a forgiven PPP loan, so if you are not clear, meet with us to see what our state requires.

What’s more, if you took a PPP loan, it may reduce the amount of business expenses you are able to write off. Typically, business expenses like payroll, rent, and utilities are deductible from your normal taxable income for the year. But if you used your PPP funds to pay for such expenses, those expenses cannot be written off, as the IRS wants to prevent businesses from receiving a “double” tax benefit.

Because you won’t be able to write off as many business expenses, if you took a PPP loan, you may end up with higher taxable revenue in 2020. That said, while the restriction on deductions is an unfortunate aspect of the PPP, it may not be the final ruling. Many in Congress have publicly opposed the new rule, and the recent stimulus proposal, the HEROES Act, reverses the restriction and allows these expenses to be deducted.

That said, the HEROES Act is only a proposal and hasn’t been signed into law, but it’s clear many lawmakers support a change to this part of PPP. Stay tuned for updates, but for now, when developing your end-of-the-year tax strategies, it’s a good idea to assume you won’t be able to deduct these expenses.

If you’d like to review your tax strategy, reach out to a Family Business Lawyer™ and schedule a time to review your finances and make adjustments that will help you come tax time.

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