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PPP Loans and COVID-19: An Illustration

PPP Loans and COVID-19: An Illustration

Given the recent developments on Paycheck Protection Program (PPP) loan forgiveness and the release of IRS Notice 2020-32 amid the ongoing COVID-19 pandemic, I put together a high-level graphic that illustrates what the cash flow and tax consequences could look like for a small business that qualifies for loan forgiveness should the ruling on the deductibility of certain expenses remain or be reversed. This graphic assumes a few things:

1. The business in question normally earns $250,000 over the period

2. The business pays salaries of $100,000 (plus payroll taxes) over the period

3. The business incurs other expenses of $25,000 over the period.

 

 

A brief explainer:

Column 1 illustrates what the impact would be on the business if no PPP loan was received and gross income was not impacted by COVID-19.

Column 2 shows what the impact would be if a $100,000 PPP loan was received, the funds were used solely to pay salary expenses, gross income was impacted by COVID-19, and these salary expenses were treated as deductible by the IRS. The end result here is that the $100,000 of loan forgiveness is tax-free, as was originally intended by Congress.

Column 3 demonstrates what the impact would be if a $100,000 PPP Loan was received, the funds were used solely to pay salary expenses, gross income was impacted by COVID-19, and these salary expenses were not deductible (Notice 2020-32). This new ruling effectively converts the loan forgiveness into taxable income for the small business owner!

While eliminating the deductibility of expenses paid with forgiven loan proceeds also eliminates the double-dipping element (receiving both tax-exempt income and allowing for a tax deduction related to the same funds), the intent of the loan forgiveness and respective tax treatment is currently up for debate. Hopefully, this illustration will help answer some questions about what the cash flow and tax consequences could look like whether certain expenses are deductible or not for small businesses navigating through this difficult time.