Paycheck Protection Program & Year-End Tax Planning

Oct 27, 2020Business, Business Tax, Covid-19

In March of this year, Congress passed the CARES Act and provided funding for Paycheck Protection Program (PPP) Loans. Many of you took advantage of the provisions afforded you related to PPP and the CARES Act. As a part of that legislation, the Act made forgiveness of the loan an exclusion from taxable income. Congress intended to make the PPP funding tax-free.

After the CARES Act, the IRS issued Notice 2020-32, disallowing the expenses associated with the tax-free loan forgiveness. They are effectively negating Congress’s intent that the forgiveness is tax-free.

We anticipated that Congress would act to clarify their original intent and make the PPP tax-free, but no Congressional action has been taken as of today, October 27, 2020. This makes year-end tax planning more complicated than in previous years.

If you have not applied for PPP Forgiveness

It may be beneficial to wait to apply for forgiveness until after your taxable year-end (in many cases, after December 31, 2020). By waiting until after the end of your taxable year, you may be able to defer the income from the loan forgiveness into the 2021 tax year.

There are additional factors for consideration, including tax rates and income in 2021, as well as implications of loan covenants on your 2020 year-end. Each taxpayer’s situation will be slightly different, and it is important to consider all factors when deciding whether to wait to apply for loan forgiveness.

We are currently advising most taxpayers to wait to apply for loan forgiveness because it appears to allow more flexibility in determining which tax year to include the income or expense. There may also be an argument made that the income should never be picked up. Please consult your Smith Schafer tax advisor about the options specific to your situation.

Consider completing the application and gathering the documents needed for forgiveness, but do not apply until you have consulted with your tax professional.

If you have already applied for PPP Forgiveness

You may wish to set up a tax planning meeting to determine the implications of the taxability of the loan forgiveness. Contact your Smith Schafer professional or click the button below to schedule a meeting.

Webinar Recording: CONSIDERATIONS FOR 2020 Q4 PLANNING

Blank

Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.

Trending Posts

Subscribe to our Blog

Related Industry Posts

Important Estate Tax Portability Update Announced

Important Estate Tax Portability Update Announced

If the federal estate tax exemption is cut approximately in half in 2026, as is currently scheduled, it may create significant issues for Minnesota taxpayers. The matter becomes especially challenging when one considers what may happen if the portability election is not made.

read more
document Organization for Your 401k Plan Audit

document Organization for Your 401k Plan Audit

s discussed in part two of our 401k blog series, one of the purposes of a retirement plan audit is to ensure the plan operates in compliance with both plan documents and IRS and DOL regulations. To do this, your auditor will request access to several documents. Some will be plan-specific documents, while others will be HR and related documents.

read more
2022 Business Valuation Considerations

2022 Business Valuation Considerations

More than two years after COVID-19 changed the world, business valuations are still challenging. At the midpoint of 2022, the idea that things have returned to ‘normal’ is certainly debatable. In many instances, historic valuation inputs, specifically past performance, cannot be taken as an indication of future performance.

read more

Subscribe to our blog

SEND US A MESSAGE

We appreciate your interest in Smith Schafer and would love to hear from you.So please complete this form or feel free to email us directly at: [email protected]