PPP loan forgiveness could lead to large tax bills

September 3, 2020

In a notice this past spring, the IRS said it had ruled out tax deductions for wages and rent paid with forgivable Paycheck Protection Program loans to prevent a “double tax benefit.” The ruling means contractors cannot write off these types of expenses if they were paid for with PPP loan funds, leaving many wondering whether it will cost more in taxes than to pay the loan back, according to www.constructiondive.com.

The U.S. Chamber of Commerce says a forgiven PPP loan is tax-exempt but using the loan can also reduce how much a construction firm can write off on its business taxes. Expenses such as payroll, rent and utilities typically are deductible from normal taxable income, but without the deduction, a business may owe more taxes than it usually pays.

Some elected leaders are pushing back on the IRS ruling. The Small Business Expense Protection Act introduced in the Senate in early May would reverse the IRS decision and make the expenses deductible. However, it is uncertain whether the legislation will pass.

Joseph Natarelli, leader of the national Construction Industry Practice group at accounting firm Marcum LLP, said some contractors are unaware of the tax implications of PPP forgiveness regarding their businesses if the ruling stands.

“Using simple numbers, the contractor who decided to borrow $9 million to keep their people employed is now going to owe,” he said. “If you’re in a 50% tax bracket, that’s $4.5 million dollars, so where are you going to get that money from?”

Many of Natarelli’s clients are considering not applying for PPP forgiveness to avoid a large tax bill. He says contractors should check with their accountants about tax implications before applying for loan forgiveness.

NRCA has joined with allied organizations in supporting the Small Business Expense Protection Act. NRCA is continuing efforts to ensure this issue is addressed in any COVID-19 legislative package approved by Congress.

View the IRS Notice 2020-32.


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