PPP Loan Forgiveness - July 15, 2020 Update
Advice: It will be much easier to prove that you paid yourself owner compensation replacement if you maintain a separate business checking account to gather your business income and disburse it to your personal checking account. If you only have one account that’s used for both business and personal transactions, things are not so clear. Since the Small Business Adminstration (SBA) has so far struggled to execute its task of supervising PPP loans, and since the SBA must approve all loan forgiveness applications, you are well-advised to make things very easy for the SBA to understand. That will make it easier for the SBA to approve your application for loan forgiveness.
How will the PPP Loan work with your taxes for 2020? As of writting this, the IRS says no deductions for expenses paid with proceeds from forgiven PPP loans.
The IRS has stated that you cannot deduct expenses paid with proceeds from a PPP loan that’s forgiven. This conclusion relies on Internal Revenue Code Section 265, which states that federal income tax deductions are not allowed for expenses relating to tax-exempt income. Because forgiveness of a PPP loan is a federal-income-tax-free event, the IRS has taken the highly debatable position that Section 265 applies. Therefore, no deductions are allowed, according to the IRS. Reportedly, more than a few members of Congress are very unhappy with that position, because they feel it’s contrary to what they intended when they authorized the PPP.
This story is still unfolding and my personal advise is to contact your lender and wait a while before filling out the paperwork as rules are obviously in flux. Art-Linx will continue to follow very carefully as we have a vested interest in both full forgiveness and how that impacts tax payments.