The Cares Act said the loan forgiveness would not be taxable.
But the IRS is saying if you get the forgiveness, the government effectively paid for certain expenses for you and you can’t deduct them — or else it is a double benefit.
So Is the PPP Loan Forgiveness Taxable or Not?
Before you get angry, calm down — it actually makes sense. And it really isn’t punitive to companies that are the most affected right now. Let us break it down to you by the numbers.
We will assume you got a $65,000 PPP loan that will be entirely forgiven. Let’s also assume that we will assume pre-COVID you were going to have $100,000 in revenue over the eight weeks, normally with $20,000 dropping to the bottom line, with a $50,000 payroll budget. Let’s look at the before vs. 20%, 50%, and 85% revenue decreases.
We also recorded this quick explainer video to walk you through this confusing aspect of the PPP loan.
Hi, my name is Matthew May with Acuity, and we’re here to answer some of your FAQs about the Payment Protection Program (PPP) — specifically, we’re talking about PPP loan forgiveness. We keep getting asked the question: Is the PPP loan forgiveness taxable, and if so, how should I plan for that? Well, it really depends on what situation you’re in and whether you’re going to have some cash tax to pay on this, but the bottom line is it’s as if it was taxable because the expenses are not deductible.
I’m just going to walk you through one example just to illustrate what that would look like. Let’s say you got a $65,000 PPP loan, and normally you have $100,000 of revenue with $50,000 in payroll, $30,000 in other expenses with a $20,000 net income. Now, typically your net income and your taxable income are the same. So that’s $20,000, and you would normally pay about 35% [in taxes], which is about $7,000.
Let’s work it through it: Say you took a 20% revenue hit out of the gate. Let see what that impact would be, and what your $7,000 tax burden looks like. So a 20% hit means you have $80,000 in revenue now. You still keep your payroll because of the PPP program and, let’s assume, that you’re still covering other expenses for now.
So you’re looking at going into a net income of zero right now. What they’re going to make you do is to add back any expenses that they paid for — they’re not going to deduct those. So in actuality, your taxable income is not zero, it’s going to be $65,000, which means you’ll have to plan for $23,000 of taxable income.
Basically, if you have not been majorly impacted — let’s talk less than 50% of your business — you should probably plan to take one-third of your proceeds for the PPP loan and use it for tax. Just remember that when you’re planning, it’s not all extra money.
If you want us to answer specific PPP questions, we have free CFO office hours which you can register for here.
At the end of the day, the PPP is still one of the most meaningful government assistance programs that small businesses have ever seen.
Have More PPP Questions?
We’re continuing to offer extended CFO Office Hours so you can get 1:1 access to one of our CFOs if you need anything. Please reach out — we’d love to hear from you and help anywhere we can.
And don’t forget — we have a free PPP Loan Forgiveness Calculator to help you plan. Download below: