The Federal Paycheck Protection Program has certainly been instrumental in keeping many small businesses afloat. It has provided over $525B in forgivable loans to over five million businesses.
But no one seems to be addressing the ticking time bomb of the additional income taxes that it may cause.
Let me set up a scenario to explain. Let’s say that you have a business that has not been too adversely affected by these trying times. You didn’t grow this year, but maybe you sold more online or you were an essential business that worked hard to maintain your market share.
You received a $150K PPP Loan and put in for forgiveness with the accompanying $150K in payroll and operating expenses. The loan is fully forgiven. What happens now? Let’s say that normally you would pay tax on $200K, but this year is different. Because you used the $150K in payroll and operating to get the loan forgiven, we cannot deduct that money on your income tax return. As such, this year you will be responsible for paying tax on $350K.
There is no such thing as free money. The tax man always cometh.
This is going to cause controversy. I almost didn’t want to write this column, but it’s important for you to know what is going to happen so that we can do some tax planning.
There are a lot of different ways to think about this, but in order to do a fair comparison we need to use an income tax rate. Let’s say that the sample customer in question pays an average income tax rate between both federal and state of 30%. There are two choices.
First, get the loan forgiven, and pay an additional $45K in income taxes. Or don’t get the loan forgiven and pay back the loan at 1% interest over a five year amortization period. Principal and interest will then cost $153,843.60.
This is a classic case of cash flow vs. deductible expenses. One side will cost you $45K while the other is $153K.
If your business is partially or entirely shut down, this will obviously not affect you as much. On the other hand, if you have a business that is on par with last year, or even close, we are going to need to make some additional tax deposits in order to handle this problem.
Will Congress fix this? Anything is possible, but I doubt it. In the annals of the taxation history of our Great Land of Liberty, there has rarely ever been any truly free money.
I know that I’m stirring up a hornet’s nest, but I don’t want you to get too worked up yet. We still need to get through the November elections. There is still plenty of time for Congress to screw up our taxes even more. If there is one thing that I have faith in, it’s their abilities.
Let me leave you with this one thought…
It always amazes me how quickly the seasons seem to change once we get past Labor Day. With daily temps in the 60’s, it’s time to pull out the coats and sweaters.
But please take a moment to remember that winter is coming.
You are going to spend enough time indoors come December and January. Get outside and enjoy as much of the fall as possible. Ride a bike, go on a nature hike, or just stroll the pristine perfection that is our lakefront. Do whatever you can now to maintain or improve your mental health.
Don’t kid yourselves my Brothers and Sisters. The snow will come. But do it knowing that we are here to help.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. If there is anything 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
President
Accounting Solutions Ltd.
773-267-7500
www.AccountingSolutionsLtd.com
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773-267-7500
chris@accountingsolutionsltd.com
