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As stay-at-home orders were put in place across the country to slow the spread of this contagious disease, many industries have been forced to curtail their activities or close down completely. Industries like restaurants, bars, travel, entertainment, and small businesses, in general, have all been hit hard. Many small business owners are struggling to stay afloat. It was in response to this economic crisis that Congress passed the CARES Act in late March. Our tax professionals have been closely following the ramifications for small businesses taking loans under the Paycheck Protection Program (PPP).
On March 27, Congress passed and the President signed into law the Coronavirus Relief and Economic Security (CARES) Act in response to the unprecedented public health and economic crises create by the coronavirus pandemic.
This act contained numerous components, one of which was the creation of the PPP. The PPP offers loans to small businesses impacted by the coronavirus in exchange for them keeping their employees on payroll.
Subject to the submission of proper documentation, the principal amount of these loans is eligible for forgiveness up to an amount equal to what the business spent on payroll, rent, and other qualifying expenditures over the eight-week period after the loan was granted. If, at any time during this eight-week period after the origination of the loan, your business cuts employee salaries or lays people off, there will be a reduction in the loan amount and you could owe money to the IRS.
Every year, small businesses claim a variety of exemptions and deductions on their tax return. Many of these are designed specifically to help small businesses thrive in the era of the big box chain stores. The number of deductions for which you are eligible will vary greatly depending on the particulars of your situation. It is smart for small business owners to consult with a tax professional each year before filing their taxes so they do not miss out on any deductions or exemptions for which they are eligible.
However, the IRS has announced that taking a PPP loan will result in your forfeiting your right to claim some of the most profitable deductions and exemptions. According to a new guidance issued by the agency, companies that qualify for loan forgiveness under the PPP program will not be eligible to deduct the wages and other business expenses they paid with the money that came from the loan. This guidance was issued in order to clarify questions surrounding the interpretation of the law. The law clearly states that the loan money will not be taxed, but did not say whether it would still be eligible for deductions.
Unfortunately for small business owners, they will not be able to receive both the loan and the deductions. The IRS claims that this is to prevent those who receive such a loan from receiving a “double tax benefit.” They point to Section 265(a)(1) of the IRS code, which generally disallows deductions for otherwise deductible expenses that are allocable to tax-exempt income, as guiding their decision.
Their interpretation does not, however, seem to be in line with congressional intent. Congress has taken notice of this new guidance and Chairman Richard Neal of the House Ways and Means Committee has stated that they plan to correct this by issuing a clearer guidance in the next law that small businesses be allowed to retain these deductions despite the loans being tax-exempt.
For now, however, you will not be able to claim these deductions if you take a PPP loan and apply for loan forgiveness
While the death and suffering caused by the virus has been the worst part of this ordeal, the economic suffering inflicted, especially on small businesses and their employees, has also been devastating. Congress passed the CARES act in order to help small businesses survive without having to lay off employees or make other drastic cuts, but unfortunately, the way the IRS is interpreting some of its provisions is actually hurting small business owners. At the Tax Law Offices of David W. Klasing, our experienced attorneys can assess your situation and advise if a PPP loan is the right choice for your business. Call our office today at (800) 681-1295 to schedule a confidential consultation.
In addition to our main office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento. During the COVID-19 pandemic, our staff are working from home, but have full virtual meeting capability.
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