A key tax deadline is just around the corner, and small-business owners who are in distress are still uncertain of what they’ll owe the IRS. For taxpayers who pay quarterly estimated taxes, September 15 marks the due date for this year’s third-quarter payment.
As if that weren’t stressful enough, small businesses that took a forgivable loan through the Paycheck Protection Program still have no clue on how to treat certain business expenses that were covered by the loan.
PPP loans, which were established by the CARES Act, require that at least 60% of the proceeds be applied toward a business’s payroll expenses to qualify for forgiveness. While the IRS has said that the loan forgiveness itself is tax-free, business expenses covered by the loan proceeds won’t be deductible.
Members of Congress disagree with this finding and have sponsored legislation calling for the deductibility of those costs. Being unable to deduct the costs would make a business’s income seem higher on paper, which could raise their tax bill. Business owners who haven’t yet applied for forgiveness are facing a conundrum as the year winds down.
Do they count the expenses covered by the PPP loan and seek deductions for them when they hash out their third-quarter taxes? Or do they allow those items to be covered by the loan but avoid deducting the costs — which could result in a higher estimated tax payment for the third quarter?
“The problem is that they don’t know if they’re getting forgiveness and there’s a good chance that someone who’s applying for forgiveness won’t know by the end of the year,” said Ed Zollars, CPA at Thomas, Zollars & Lynch in Phoenix.
“Currently I would tell clients that if you want to be safe and we’re talking about estimates, then treat the expenses as non-deductible so that you’ve overpaid,” he said. The Small Business Administration, which is overseeing the PPP loan program, opened its window to accept forgiveness paperwork from banks in August.
However, applicants and tax professionals have been waiting for action from Congress to see if legislators finally address the deductibility issue before they apply. Banks have also held off on forgiveness in anticipation of possible regulatory and legislative changes.
As the year progresses, tax professionals are presenting clients with a choice: deduct the business expenses and potentially pay less in estimated taxes for now, or don’t deduct the costs but possibly pay more in taxes for the quarter?
“You’ll present them with the two situations,” said Dan Herron, CPA and principal of Elemental Wealth Advisors in San Luis Obispo, California. “Either they want to be conservative and pay in, and they don’t care if they get a huge refund,” he said. “Or some are aggressive and want to pay the least amount possible.”