Expenses for PPP Loan Forgiveness deemed Non-Deductible

A little over a week ago, I wrote a revision stating that any forgiveness of debt on the PPP Loan Program, was not to be included as income on a business income tax return. I also wrote that The IRS would probably do something in reference to this unreasonable law. In effect, the way that the law was written, you did not need to match income to expenses. In other words, you could still deduct the expenses, but were not required to include the income.
Late in the evening, on April 30th, The IRS released new guidance in reference to this obvious break in tax law. This was done in a rather secretive manner by them putting something on their website, and not telling anyone that it was there. This is the normal way that The IRS goes about its business when it does something as unpopular as this will probably prove to be.
I realize how confusing this is, so let me take you through an example. Let’s say that you had 5 employees and you were paying all of them $10,000 per month. That would qualify you for your monthly payroll of $50,000 X 2.5 or a $125,000 PPP Loan. But you only hire back three people at their original amount of pay while maintaining your non-payroll operating expenses. What would still be eligible for forgiveness?
You’re paying three people $10,000 per month or a total of $60,000 plus the overhead of $25,000 for a total of $85,000 which is eligible to be forgiven. Since you only hired back 3/5ths or 60% of your workforce, the $85,000 which is eligible must be multiplied by the percentage that you hired back to get the actual amount to be forgiven of $51,000.
From an accounting standpoint, there are several things that just happened.
1 – Initially you received a $125,000 loan. Loans are not income. They are picked up on your balance sheet in the liability section.
2 – You hire back three people and only have $51,000 of your initial loan forgiven.
3 – Your Loan Payable balance is reduced to $74,000 which then must be repaid to your lender over an 18 month amortization period at 1% interest.
4 – $51,000 of your deductible expenses just became non-deductible leaving a $34,000 deduction for the remaining payroll and operating expenses.
5 – The only thing which is deductible on your loan repayment is the deductible interest for the period. Your payment will be $4,143.73 per month. Your deductible interest over the first year will only be $514.84. The $49,209.92 in repayment of principal on the loan is not deductible.
Writing a check for over $4,000 each month and only getting a deduction for $500 at the end of the year is obviously not an optimal situation for anyone. I have had many conversations with clients who are either fully or partially shut down, and the aforementioned scenario is most common, or even worse.
I spoke to one of my food and beverage facilities which is entirely shut down. He had forty employees, and is now down to three. He received a $587,000 PPP Loan. Eight weeks from now he will be lucky if he can get 10% of it forgiven. He needs the money in order to stay open. At this point, no one knows how long we will be shut down. He’s looking at a monthly repayment on the loan of just under $29,566.10. There’s no way that he can afford that type of payment.
What can he do?
Knowing that he is walking into a problem, he is securing a line of credit financing with a much longer amortization period to repay whatever is left on The PPP Loan after forgiveness. This way he will be able to pay his bills, remain open, and will only finance whatever is left under much more favorable repayment terms.
If you are staring down the same scenario, I would suggest that you do the same.
Let me leave you with this one thought…
I’m having some pretty frightening conversations with many of you. Entrepreneurs who are more experienced, more disciplined, and more seasoned even than I am are saying things that I never thought would come out of their mouths.
I know how frightening this is. I know that you’re not hearing a lot of good news now. Every time you turn on a TV or a radio it’s all war, famine, death and pestilence. Most of you walk into empty businesses that frighten you more each day. We listen to our elected officials simply repeating that there is no end in sight, and your families are driving you nuts.
When you really need to go somewhere and have a cocktail, you can’t.
You need to keep it together. Even when things seem the most out of control, you need to keep your emotions and your temper under control. Go do something that you enjoy, but come back with the restraint and discipline necessary to do your job.
And remember that we are here to help.
Accounting Solutions Ltd. stands ready to fulfill its mission and purpose of protecting you, your family, and your business. If there is anything that you need, anything at all, please don’t hesitate to contact us. I’m here and I remain,
Sincerely yours,
Chris Amundson
Accounting Solutions Ltd.
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