IRS Says No Double Tax Benefits From PPP Loans
New guidance from the IRS explains tax consequences of PPP loans that are forgiven.
Editor’s note, Jan. 11: The IRS has reversed its position on “double dipping” in accordance with the economic relief law enacted in late December. See IRS Reversal: Expenses Paid With PPP Loan Funds Are Now Tax-Deductible
There’s a new wrinkle introduced by the IRS for the Payroll Protection Program that advisors and their clients taking these loans should be aware of.
If their PPP loans are forgiven, which is a benefit of the program, those businesses will not also be able to claim the usual business tax deductions for wages, rents and other expenses, according to new guidance from the IRS.
“This treatment prevents double tax benefits,” according to the IRS notice, noting that its stance “is consistent with prior guidance” of the agency.
PPP loans are designed to help small businesses (with no more than 500 employees) retain employees by paying eight weeks of payroll costs, excluding salaries above $100,000. If businesses use 75% of loan proceeds for payroll purposes, retain their full-time employee headcount and don’t cut salaries for any employee earning less than $100,000 by more than 25%, their loans can be forgiven. If they rehire recent laid-off employees by June 30, they can also qualify for loan forgiveness.
Businesses that have their loans forgiven under the program don’t have to pay taxes on the forgiven loan amount.
“The issue isn’t that the loan was forgiven but that you didn’t have to claim as income the amount of forgiveness,” which is not usually the case, explained Brian Hamburger, founder, president and CEO of MarketCounsel.
If those businesses were able to also deduct expenses like payroll and rent, they would be receiving triple, not double, tax benefits, said Hamburger. Also, said Hamburger, “If an expense is covered by a PPP loan, and that expense is later forgiven, then it’s not an expense at all.”
Leon LaBrecque, chief growth officer of the Sequoia Financial Group, said financial advisors “should absolutely consider PPP loans for their clients. I have been recommending them and many folks have gotten them. They are helping small businesses and nonprofits.”
Financial advisors who take PPP loans will have to report the loans on their ADV forms, according to recent SEC guidance. As a result, some advisory firms may view taking a PPP loan as a sign of weakness, but they shouldn’t, Hamburger said.
If advisory firms take a PPP loan to support their payrolls it says that they’re “in there with the rest of us and want to retain employees,” Hamburger said. His firm has taken out a PPP loan.
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