It’s been a rough time for small businesses over the last month. We’ve all gone through a fast PPP loan application, documentation, then waiting, and finally getting our PPP loan proceeds. With this, we can keep our employees employed instead of laying them off. Now, just as we sigh with relief that we might make it until things open up again, the Empire Strikes Back.
Buried deep in the bowels of IRS HQ, is a research analyst named Samuel. He lives and breathes Internal Revenue Code (IRC). Now being very good at what he does, Samuel found an obscure IRC section 256 that states that deductions can’t be taken if they are tied to a certain class of tax exempt income.
The actual language in the CARES Act where the PPP Loan came from says, “For purposes of the IRC of 1986, any amount which would be includible in gross income of the eligible recipient by reason of forgiveness… shall be excluded from gross income.”
The IRS has decided to override Congress, thanks to Samuel’s findings in the IRC 256, and now says that, in essence, the proceeds are taxable. How they get there is to say, “Yes, the loan forgiveness is NOT taxable, but the payroll expenses that you paid with that loan are no longer deductible.”
EXAMPLE: Ben Franklin, a local beer maker gets $150,000 PPP loan. He uses it to pay $150,000 in payroll over an 8-week period, thus qualifying to have the PPP loan of $150,000 forgiven. Ben now has $150,000 less Payroll expense at the end of the year, and thus, must pay tax on $150,000 more than he would have if he never got the PPP loan. Thus, in a roundabout way, Ben Franklin Beer is paying tax on the $150,000 PPP loan proceeds. This means that Ben, for keeping his employees on the payroll instead of laying them off, getting nothing for himself, now has to pay a tax for doing that kind deed.
Leave it to the IRS to find a way to make it rain on our small business parade.
The only way this can be reversed now is if Congress puts a clarification in the next piece of legislation they pass, stating the IRS is wrong, and any expenses paid with the PPP loan proceeds are STILL deductible by the business. So, call your congressman and beg them to fix this ASAP.
By the way, the IRS analyst, Samuel, became an Uncle recently. Yup. He’s now known as “Uncle Sam.”
Did you hear? Prov 31:9 says, “Open your mouth, judge righteously, and plead the cause of the poor and needy.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.
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