Will PPP Loan Forgiveness Make You Owe the IRS More?

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The Paycheck Protection Program (PPP) helped many companies remain in business during the early days of the pandemic, when quarantine prompted a huge economic downturn. Now, however, business leaders worry that, by accepting PPP loans, they may have sparked a downward spiral in their dealings with the IRS.

Much of the current anxiety surrounding taxes and the PPP stems from misinformation — and in many cases, a sheer lack of guidance. We clarify the program’s tax implications below:

Forgiven Loans And Taxable Income

According to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the amount forgiven for the PPP will not be deemed taxable income. Allegedly, this means that businesses will not be required to pay taxes on funds provided through the loan, provided they meet the program’s requirements for forgiveness.

The Impact on Tax Deductions

Unfortunately, while PPP funds that are later forgiven do not qualify as taxable income, the program may still prove problematic come tax season. According to a notice from the IRS, deductions are not available when forgiven loans are not included as taxable income. Since payroll is typically deductible, this may lead to significantly higher payments. For this reason, some businesses have actually considered not applying for loan forgiveness, as they fear the potential for future tax problems.

The good news? The IRS notice may not have actually provided the final word on PPP-related tax deductions. The proposed Health and Economic Recovery Omnibus Emergency Solutions Act (Heroes Act) promises to reverse the previous decision regarding deductibility. Should the Heroes Act pass, businesses may see considerable tax relief even after seeking loan forgiveness.

If you’re confused about the IRS implications of PPP loan forgiveness, you’re far from alone. At the Highland Tax Group, we’re committed to guiding you through this complicated landscape as we make every effort to minimize your IRS-related stress. Contact us to learn how we can help.