What a year 2020 was, and so far, 2021 has also been quite interesting. For entrepreneurs, we finally have good news regarding PPP loan repayment.
After some confusion over the past year, we finally know whether businesses who have taken out PPP loans will deduct qualifying expenses, which will allow for the loan to be forgiven. The Internal Revenue Service (IRS) and the Treasury Department recently released a guide on claiming deductions for expenses associated with payroll protection program loans. The clarification is great news for anyone who has received a PPP loan in the past year.
The tax guidelines in Revenue Ruling 2021-02 also reverse previous guidelines issued last year by the IRS and the Treasury when, for some reason, former Treasury Secretary Steven Mnuchin opposed struggling small business owners' capacity to deduct the expenses related to the repayment of the PPP loan. A wide range of business groups, including the American Institute of Chartered Accountants, campaigned for the ability to write off these business expenses. To paraphrase, these groups have generally argued that the taxable reduction in such spending would extend support for PPP loans to struggling businesses. Moreover, it was in line with Congress's intentions when the CARES bill was passed last year, establishing PPP loans as a way to quickly get money into the hands of desperate independent entrepreneurs.
The latest coronavirus aid bill included a clause allowing for expense deductibility and PPP revitalization and the creation of a new $284 billion fund for future PPP loans. This change will allow businesses that have received such loans to deduct expenses related to the Small Business Administration's loan application. Simply put, it makes PPP loans more valuable for entrepreneurs.
This new revenue resolution supersedes the previous IRS and Treasury guidelines, stating that PPP loan forgiveness expenses cannot be deducted.
What does this mean for tax planning at the end of the year?
Some of you reading this article have probably already had your PPP loan forgiven. In contrast, some have not had their PPP loans forgiven. Either way, this clarification from the IRS will allow us to revisit its tax assumptions for 2020. This may include how much the company expects to contribute to its profit-sharing plans and cash balance pension plans for the 2020 tax year. For others, this may change the number of your estimated tax payments due in 2021.
The bottom line for business owners is that this is a great win. Depending on the business's profitability, allowing these tax deductions increases each PPP loan value by 10-37% at the federal level. For some businesses that are on the verge of closing, that extra lifeline could be the one that helps keep the doors open. In other cases, it could allow business owners to bring back some employees or avoid another round of layoffs. Yes, in other cases, it will just put more money back in the pockets of entrepreneurs who are otherwise doing well.
Work with your tax professional and certified financial planner to determine what this IRS change means for you and your taxes.
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