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PPP Forgiveness Could Change Tax Bills

Friday, September 25, 2020

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According to reports, businesses that received Small Business Administration’s Paycheck Protection Program loans during the COVID-19 pandemic could experience higher taxable revenues.

The concern arrives after the Internal Revenue Service ruled that businesses couldn’t write off tax reductions for wages and rent paid using the forgivable PPP loans as to prevent a “double tax benefit.”

Loans in Construction

The initial round of PPP opened on April 3, and just a day before, the Treasury released an interim final rule that stated that to qualify, businesses must have 500 or fewer employees and fall below the agency’s small business size standards to qualify.

JTSorrell / Getty Images

According to reports, businesses that received Small Business Administration’s Paycheck Protection Program loans during the COVID-19 pandemic could experience higher taxable revenues.

This gave way to questions from those in the construction industry, mostly revolving around the small size standards (as defined in section 3 of the Small Business Act, 15 U.S.C. 632). For construction businesses, this is generally determined by an average annual income threshold, not a number of employees threshold.

Data released at the end of April by the SBA revealed that the majority of funds divvied from the PPP ended up going to the construction industry. The numbers indicated that the construction industry received 177,905 loan approvals, totaling about $45 billion and amounting to 13.12% of all loans—the majority when divided up into subsectors.

By the time the program ended at the end of August, reports indicated that more than five million forgivable loans had been given to small companies, amounting to $525 billion.

In June, President Donald J. Trump signed H.R. 7010, or the “Paycheck Protection Program Flexibility Act of 2020,” updating the PPP terms. Some of the changes included:

  • An extended cover period of the PPP loans from eight weeks to 24 weeks;
  • A change in the forgiveness requirement from 75% of payroll costs to 60% of payroll costs;
  • A space for employers to make a good fair effort to hire or rehire;
  • An extended maturity of the PPP loans from two to five years; and
  • An opportunity for loan recipients to defer payroll taxes through the end of 2020.

In addition to the changes in the amendment, the government issued an updated an FAQ at the end of May dealing with the differences of loans above and below $2 million.

In previous guidance, the Treasury Department had said that all PPP loans of $2 million or more (upon an application of forgiveness) would be audited with the possible implication of investigation and penalty enforcement.

However, the recent clarification states not only that would loans less than $2 million be “automatically deemed” to have acted in good faith, but that while loans at and above $2 million would still be reviewed, the party would be required to pay back the loan without penalty of enforcement action.

PPP Loan Forgiveness & Taxable Income

According to the U.S. Chamber of Commerce, PPP loans can be forgiven as long as at least 60% of the funding was spent on employee payroll cost, while the other 40% should have been used for mortgage interest, rent and utility payments. Additionally, forgiveness is also based on an employers’ continuance to pay employees at normal levels over 24 weeks following the origination of the loan.

To apply for forgiveness, businesses who received a loan will have to file a PPP Loan Forgiveness Application with the Treasury Department through the private lender they obtained the loan from.

If the PPP is deemed forgiven, then the loan is tax-exempt. However, as aforementioned, the exemptions can in turn reduce the amount a business writes off on its taxes, meaning the company could owe more taxes than compared to previous years.

Although, through the PPP Flexibility Act, employers can defer these taxes even after the PPP loan has been forgiven. If deferred, employers are required to pay 50% of the deferred taxes that accumulated in 2020 by Dec. 31, 2021, and the other 50% of the deferred amount would have to be paid by Dec. 31, 2022.

In given the decision of forgiveness verse using tax write offs and paying the loan back, some elected officials are opposing the IRS ruling. According to reports, in early May the Senate was introduced to The Small Business Expense Protection Act, which would reverse the IRS decision and make expenses deductible. However, there has been pushback over the legislation.

To put the ordeal in a contractor’s perspective, Joseph Natarelli, leader of the national Construction Industry Practice group at accounting firm Marcum LLP spoke on the tax implications, saying, “Using simple numbers, the contractor who decided to borrow $9 million to keep their people employed is now going to owe. If you're in a 50% tax bracket, that’s $4.5 million dollars, so where are you going to get that money from?”

Natarelli added that some contractors are unaware of the possible implications the PPP forgiveness could have on their business, while some of his clients are already considering not to apply for forgiveness in order to avoid the larger tax bill. Ultimately, Natarelli suggested that contractors should check with their accountants about tax implications prior to applying for PPP forgiveness.

“It’s an issue that contractors need to be aware of and I think people took PPP loans that don't even know it's taxable now, which is scary,” he said.

View all of PaintSquare Daily News' coverage on COVID-19, here.

   

Tagged categories: Business management; Business matters; Business operations; COVID-19; Economic stimulus; Economy; Government; NA; North America; Program/Project Management; Project Management

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