Because of the way in which the PPP program is written in the CARES Act, it creates a potential tax issue for forgiven loans. Expenses used in the forgiveness calculation, which include payroll, health insurance, retirement contributions, rent, utilities and mortgage interest are NOT deductible. This presents a potential tax liability because the forgiven amount indirectly becomes taxable.
It’s important to keep this in mind when planning your 2020 tax strategy. Some PPP borrowers are electing to adjust their quarterly estimated tax payment now to avoid a large bill later. Depending on the type of year you’re having, you can also look to defer income into 2021, pay bonuses to staff, and/or increase retirement contributions in line with your overall profit expectations for 2020 and 2021. If you’ve been planning to purchase equipment you can also take advantage of accelerated depreciation rules.
We are hopeful that Congress will pass legislation that allows for the full deduction of forgivable PPP expenses but until we know more, it’s important to plan accordingly.