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
What do I need to know about tax season this year?
Glad you asked! We have a whole separate FAQ section on that. Some quick hits: The deadline has been extended from April 15 to May 17 for individuals. Also, millions of people received unemployment benefits in 2020 — up to $10,200 of which will now be tax-free for those with an adjusted gross income of less than $150,000. And, for those who filed before the American Rescue Plan passed, simply put, you do not need to file an amended return at the moment. Find answers to the rest of your questions here.
How long will it be until the economy is back to normal?
It feels like things are getting better, more and more people getting vaccinated, more businesses opening, but we’re not entirely out of the woods. To illustrate: two recent pieces of news from the Centers for Disease Control. Item 1: The CDC is extending its tenant eviction moratorium to June 30. Item 2: The cruise industry didn’t get what it wanted — restrictions on sailing from U.S. ports will stay in place until November. Very different issues with different stakes, but both point to the fact that the CDC thinks we still have a ways to go before the pandemic is over, according to Dr. Philip Landrigan, who used to work at the CDC and now teaches at Boston College.
How are those COVID relief payments affecting consumers?
Payments started going out within days of President Joe Biden signing the American Rescue Plan, and that’s been a big shot in the arm for consumers, said John Leer at Morning Consult, which polls Americans every day. “Consumer confidence is really on a tear. They are growing more confident at a faster rate than they have following the prior two stimulus packages.” Leer said this time around the checks are bigger and they’re getting out faster. Now, rising confidence is likely to spark more consumer spending. But Lisa Rowan at Forbes Advisor said it’s not clear how much or how fast.
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