S-corp client asks me, "my $160K PPP loan is being forgiven, so now I have to pay tax on it?!" I respond, "no, CARES act states that forgiven loan amounts are excluded from gross income when used for intended purposes";
But he doesn't lke that answer, so he comes back and says, "My P&L now shows $160K deduction for expenses paid, but once that deduction is removed, now I'm paying tax on it!"
So now I finally understand all the discussion earlier this year about how to account for PPP loans. And how most people don't really understand how any loan really works for tax purposes, and how AICPA is deliberately ignoring their own craft (debits/credits, anyone?) to lobby on behalf of business owners against all other taxpayers. And the IRS' position on deductibility is completely correct.
Forget PPP for a moment. When a business takes out ANY loan, it becomes a liability on the Balance Sheet and the expenses paid with the money are deductible. What a great deal - spend someone else's money (the bank loan), and get a tax break! What is conveniently ignored is that every penny of deduction taken now is offset in the future with a penny of taxable income that doesn't go into the business owner's pocket, instead it is transferred back to the bank. So you get a tax deduction this year based on someone else's money, and you have taxable income in a future year based on someone else's money (repayment of the bank loan with after-tax dollars) -- it's a wash.
A PPP loan is no different. Essentially, it is a "pass through" benefit intended to help the employees, not the business owner. (Hence Paycheck Protection, not Profit Protection). It is a wash and always will be a wash, since you either (a) get a deduction and then pay back the loan, or (b) don't get a deduction and have the loan forgiven. If you have a business with suddenly no customers, you wouldn't normally pay employees to hang around doing nothing. But Congress wanted to keep those folks off of unemployment (for the optics only), so they said, "here, we'll give you some money so you can keep paying your employees to hang around doing nothing". (which, incidentally, will be partially returned to the government in the form of taxes on that wage income).
Now to the extent the business owner is also an employee (or sole proprietor), they too are getting the benefit of Paycheck protection. But to suddenly give a double-dip deduction for expenses paid with non-taxable income is a pure govenment handout to a bunch of "welfare queen/king" business owners.
But he doesn't lke that answer, so he comes back and says, "My P&L now shows $160K deduction for expenses paid, but once that deduction is removed, now I'm paying tax on it!"
So now I finally understand all the discussion earlier this year about how to account for PPP loans. And how most people don't really understand how any loan really works for tax purposes, and how AICPA is deliberately ignoring their own craft (debits/credits, anyone?) to lobby on behalf of business owners against all other taxpayers. And the IRS' position on deductibility is completely correct.
Forget PPP for a moment. When a business takes out ANY loan, it becomes a liability on the Balance Sheet and the expenses paid with the money are deductible. What a great deal - spend someone else's money (the bank loan), and get a tax break! What is conveniently ignored is that every penny of deduction taken now is offset in the future with a penny of taxable income that doesn't go into the business owner's pocket, instead it is transferred back to the bank. So you get a tax deduction this year based on someone else's money, and you have taxable income in a future year based on someone else's money (repayment of the bank loan with after-tax dollars) -- it's a wash.
A PPP loan is no different. Essentially, it is a "pass through" benefit intended to help the employees, not the business owner. (Hence Paycheck Protection, not Profit Protection). It is a wash and always will be a wash, since you either (a) get a deduction and then pay back the loan, or (b) don't get a deduction and have the loan forgiven. If you have a business with suddenly no customers, you wouldn't normally pay employees to hang around doing nothing. But Congress wanted to keep those folks off of unemployment (for the optics only), so they said, "here, we'll give you some money so you can keep paying your employees to hang around doing nothing". (which, incidentally, will be partially returned to the government in the form of taxes on that wage income).
Now to the extent the business owner is also an employee (or sole proprietor), they too are getting the benefit of Paycheck protection. But to suddenly give a double-dip deduction for expenses paid with non-taxable income is a pure govenment handout to a bunch of "welfare queen/king" business owners.
But if you are like me, its just not right to do so. Karma is a ______ ! Heck we even gave all our stimulus monies to local families in need.
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