I would like to thank our Brother John in the Environmental Business for bringing this to my attention. If you had asked whether or not this was possible, up until about 4:30 pm yesterday, I would have said something like, “When pigs fly.” Well guess what sports fans. There’s bacon in the treetops. You can find The CARES Act at the following web address…
If you go to Section 1106, in reference to any PPP Loan amount that is forgiven, it reads and I quote…
” (i) TAXABILITY.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”
And to what did my bloodshot eyes appear?
But a rusted old sleigh and eight mangy reindeer.
Christmas really will come twice this year.
I’m sure that you don’t realize how unprecedented, unusual, and significant this actually is. Given the fact that most of you weren’t silly enough to go to Accounting School or sit for a mind-numbing two day exam and become a tax nerd, please allow me to explain this delusional, absurdity.
I practice a profession which has rules; very old rules which are never broken. One of the oldest rules of Accountancy and Taxation is The Matching Principle. This has to do with the fact that we must match income and the appropriate expenses. The concept is that if you do not have income, you should not have expenses. You can only have a Cost of Goods Sold, if you sell something in the first place. This law was true right up to the moment that they signed The Cares Act into law.
Now you can deduct expenses without picking up income.
Please understand what has occurred. You have payroll, benefits, utilities, rents and/or mortgages, so you get The PPP Loan. Over the following eight weeks you spend that money on the proper expenses and it is forgiven. This forgiveness is a tax benefit which, given the last hundred years of tax law precedent, is a taxable event. If you do not have to repay a debt, you have been enriched. As such, tax law has always held that you are required to pay income tax on that event.
But not now. All of a sudden the government has actually passed out Free Money. They not only gave money, but you don’t have to pay tax on the income, and you can still deduct the expenses.
Before you start dancing a jig, I would suggest caution. Whenever Congress passes a law that runs contrary to hundreds of years of tax law, do you actually think that the IRS ends up enforcing it? There is a system in place to either change or negate that law entirely called the Tax Court System.
The only thing that the Feds need to do to change this portion of the law is to audit a return where this forgiveness of debt was shown as non-taxable. In the audit the deduction is disallowed. The taxpayer disagrees with the audit findings and takes the matter to tax court. If the judge in the tax court agrees that the forgiveness of debt should be taxed, then the law is negated.
I’ll bet you dimes to donuts that right now there is a legal team in the Kluczynski Federal Building preparing a challenge to this law, in a case that doesn’t even exist yet. This is probably why our more Conservative Members of Congress actually voted for something like this in the first place. Under this law, they are passing out money where they can’t even collect taxes. The Conservative Members probably realized that given the next seven months, this portion of the law would probably never be enforced.
I should caution those of you who are not our clients to be careful. Tax Practitioners come in two very separate and distinct categories. There are those who will take every and any aggressive position on a tax return possible, in the hopes that the client will be audited. That’s right. They want you to be audited. Why? Because when you are audited, they get to charge you a four or five figure sum, to take you through the audit, so that the Government can impose a tax that they should have received in the first place. Only now, the Government also gets interest and penalty. In other words, you get totally screwed.
The second category of Taxation Professionals are people like us who realize that their main job is to make their clients invisible; to make sure that there is no reason for any auditor to knock on your door in the first place. We know the tax laws of our nation well enough to know where we can be aggressive, and where we should be conservative. I haven’t had one of my tax returns audited at the Federal level since 2011. That’s really saying something since most of my clients are perfect audit targets.
I will try to provide more on this forgiveness of debt issue, as the situation unfolds in the coming months…
Let me leave you with this final thought.
It’s Friday, and we all just made it through another week of absurdity and insanity. No matter what business you are in, there isn’t any way that this isn’t affecting you in one way or another. Some are doing better, but most are doing worse. Tempers are short. Our abilities to actually think through a problem in many instances, has ceased to exist. You need to keep it together.
In order to do that, you need to take some time this weekend to recharge your batteries.
I don’t know what it will take. Maybe you could do some gardening, knit a scarf, or work on that scrap book that you have been putting off for the last couple of years. Whatever you do to feed your soul, you need to take some time and get it done. Monday is right around the corner, and only whatever God you pray to has any idea what is going to hit us next week.
But whatever it is, we’re going to get through it. My Brothers and Sisters, we will to get through this together.
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, you have but to ask. I’m here, and I remain,
Accounting Solutions Ltd.
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