Paycheck Protection Program loan recipients face a new challenge: Taxes
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This is about the time of year when businesses across the country start figuring out their taxes: How much money they made this year and how much they spent on business expenses. But this year, there’s a new and thorny wrinkle in that process for businesses that received Paycheck Protection Program loans.
A few weeks ago, Randy George got an email about his bakery — the Red Hen Baking Co. in Middlesex, Vermont — from a business advocacy group. The email was a warning for businesses that received Paycheck Protection Program loans or other pandemic relief.
“For many of you, that will create a 2020 Income Tax liability that will need to be paid early in 2021,” the email read.
A tax liability early next year would be painful,” George said. It’s getting colder, and business is already slowing down. Virus cases are rising.
George said the PPP loan got the bakery through the spring and summer, but the threat of a big tax bill?
“It makes you wonder if it’s gonna come back around to bite us,” he said.
Under current rules, businesses whose PPP loans are forgiven are not allowed to claim deductions on the expenses the loan money paid for: payroll, utilities, rent.
Matt Hetrick runs the accounting firm Harmony Group in Maryland. He said fewer deductions mean business owners will end up owing taxes on more income.
“The indirect situation here can be one for a number of businesses where you’re going to end up paying taxes on that money, even though that’s not necessarily what was intended,” he said.
Hetrick said he’s advising his clients to hold off on applying for forgiveness. The thinking is maybe the rules might change to allow expenses to be deductible.
“You certainly want to be careful about making any decisions that then lead you to pay tens or hundreds of thousands of dollars in taxes, right as you’re coming out, hopefully if we’re lucky, of another wave of coronavirus,” he said.
The bottom line is small businesses are facing a ton of uncertainty about the taxes they may owe on their PPP loans. Hetrick said he’s still not sure when a business should say the loan was forgiven: “Is it something you would recognize in 2021’s tax year? Would it happen in 2020? What’s the interplay between those two things?”
All of that means small business owners are preparing for uncertain tax bills. Jackie Laundon is a public health consultant based in Colorado who got a PPP loan.
“When I get a payment from a client, I just automatically deduct about a third of it to put into a tax account and just try and pretend that money’s not there,” she said.
Laundon said it’s not easy to set aside cash that she could otherwise spend today.
“I was just looking at whether I could let up a little bit on those estimates, and I think, just on the edge of caution, I’m gonna keep estimating it the way that I have been,” she said.
That way, she’ll be able to cover a bigger-than-expected tax bill if she gets one next year.
COVID-19 Economy FAQs
Are states ready to roll out COVID-19 vaccines?
Claire Hannan, executive director of the nonprofit Association of Immunization Managers, which represents state health officials, said states have been making good progress in their preparations. And we could have several vaccines pretty soon. But states still need more funding, she said. Hannan doesn’t think a lack of additional funding would hold up distribution initially, but it could cause problems down the road. “It’s really worrisome that Congress may not pass funding or that there’s information circulating saying that states don’t need additional funding,” she said.
How is the service industry dealing with the return of coronavirus restrictions?
Without another round of something like the Paycheck Protection Program, which kept a lot of businesses afloat during the pandemic’s early stages, the outlook is bleak for places like restaurants. Some in the San Francisco Bay Area, for example, only got one week of indoor dining back before cases rose and restrictions went back into effect. Restaurant owners are revamping their business models in an effort to survive while waiting to see if they’ll be able to get more aid.
How are hospitals handling the nationwide surge in COVID-19 cases?
As the pandemic surges and more medical professionals themselves are coming down with COVID, nearly 1 in 5 hospitals in the country report having a critical shortage of staff, according to data from the Department of Health and Human Services. One of the knock-on effects of staff shortages is that people who have other medical needs are being asked to wait.
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