PPP Loan Forgiveness Tax Planning Issues

The tax implications on PPP Loan Forgiveness, have become a large issue. Please allow me to review the basics.
Let’s say that you are not one of the companies that is having a horrible year. Through hard work and diligence, you have been able to maintain your overall sales and profitability. March rolled around, and you put in for and received a PPP Loan of $100,000. Since it is a loan, it is certainly not income. You fill out Form 3508 for forgiveness, send in the required documentation, and have the loan forgiven.
Now, we must remove the $100,000 from your payroll and operating expenses that were used to get the loan forgiven. Usually you pay income taxes on $150,000. Because we have to remove $100,000 from your expenses, you now have to pay tax on $250,000. This begs a question.
Are there any tax planning strategies that can be used to help or reduce your taxes?
Timeline Complexity
This is complicated. The steps include
1) Borrowers can choose either the 8 or 24 week covered period for loan forgiveness.
2) Once the covered period has ended, a borrower then has up to 10 months to submit the loan application for forgiveness.
3) The banking institution then has 60 days to review the application.
4) If all goes well, the SBA then has 90 days to remit the forgiveness amount to the lender so that the loan can be forgiven.
5) It is then the lender’s responsibility to notify the borrower of the amount that has been forgiven.
So what is the actual date of forgiveness? It’s the date that we receive a letter from your lender giving the actual amount of forgiveness.
When will that occur? That’s a good question.
Tax Planning Opportunities
This presents an opportunity. If we can postpone an eventual tax legally into a future taxation period, we may or may not have saved money.
Scenario One
We are able to postpone an eventual income tax, and the tax rates do not increase. If we would have been forced to pay the tax in 2020, and can legally postpone the tax until 2021, then the presumption is that you have saved the money and earned interest. The tax will then cost you less in 2021, given the time value of money.
Scenario Two
We are able to postpone an eventual tax, but the income tax rates increase. We have an election in November. One of the candidates has already said that he will increase income tax rates to the former, higher brackets. If that were to occur, then it would have been better to get the loan forgiven in 2020, and to pay the tax at lower income tax rates.
Scenario Three
We are able to postpone the eventual income tax to next year, and they decide to forgive all PPP Loans below $150,000. If you didn’t use the money properly, then this would be a win win scenario, whether the taxes are increased or not.
The permutations are almost endless.
I know that I’m going to get a lot of telephone calls about this. I also know how important it is for us to plan, and think this through.
Let’s give this some thought and make an informed decision.
Let me leave you with this one thought.
The elections in November are a bigger thing than many realize. We certainly hear every day about the Presidential Election. Please also realize that there are 35 Senate seats and 435 Congressional seats being decided in November as well.
This isn’t a small thing.
Tax planning in an election year is by definition impossible. No one has a crystal ball. If we did, we’d all be in a completely different business.
Let’s not forget the major change being offered by our state with what many call, “The Fair Tax.”
In a regular, non-election tax year, the lawmakers are sometimes still passing new tax laws as late as the 20th of January. Not knowing what tax laws will be in place is the normal state of affairs. But not even knowing who will be in place to make the new laws, adds yet another insane wrinkle.
All of these factors make it impossible to plan, but we have to try.
I will continue writing three days per week, trying to keep you up to date on the latest changes. When you have questions, please don’t hesitate to contact us.
As you know, Accounting Solutions Ltd. takes tax planning seriously. If there is a way for us to legally reduce your taxes, while not putting you in an overly aggressive position where you will face an audit, we will get it done. We’ve done it for years, and will continue our mission.
If you are not one of our clients, we would love to talk to you. If your current accountant doesn’t keep up with the most current developments, doesn’t know how to return a call, or has you paying too much in taxes, we provide a complimentary consultation. Please contact us today.
There’s a lot of uncertainty out there. But know that you don’t need to go through this alone.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whatever you need, whether you are a current client or not, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
Accounting Solutions Ltd.
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