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IRS Rule Hurts Businesses with PPP Loans

Everyone’s good buddy, the IRS, did struggling small businesses dirty when no one was watching. Paycheck Protection Program loans were designed to help small business that were reeling with the COVID tsunami. The basics of the program were fairly straight forward: spend the money mostly on payroll to take care of your employees and the loan will be forgiven. It was a lifeline to small businesses when they needed it most. I applied and helped other clients apply as well.

But now the IRS is tugging that Paycheck Protection lifeline away.

On April 30 – in the dark of the evening when nobody was paying attention – the IRS changed the rules. It eliminated much of the benefit of the Paycheck Protection Program loans. The new rules: businesses that receive Paycheck Protection Program loans may not receive tax deductions for using those funds to pay expenses like payroll and rent. No deduction for doing exactly what the PPP loan rules told businesses to do.

Congress specifically drafted the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act so that small businesses could receive the loans, spend the money, earn loan forgiveness and not have them count as taxable income. Business owners already feel that the Paycheck Protection loans have too many strings attached. The rules also are continually changing causing borrowers to worry that their loans will not be forgiven. The IRS’ move seems to be totally inconsistent with what Congress intended.

Here’s how the IRS taketh away from struggling businesses:

Say a business receives a $300,000 loan to cover payroll for eight weeks. If the business cannot deduct that amount as expenses, that means its federal tax burden bites at a rate of 37%. That equates to a $111,000 increase in taxable income. It reduces the tax-free benefit of the loan to $189,000 intended by Congress. Thanks IRS – you never disappoint!

We do not this is how Congress intended the Paycheck Protection Program loan to work. We encourage you to call your federal representatives, senators and the Small Business Administration. Call your local news station and tell them how this change is going to make things even worse for your business. Hopefully with enough pressure, the IRS will back down, or Congress will pass legislation restoring the deductions. A group of Congressmen have already sent a letter to the IRS. You can echo their sentiments in your calls and letters to Congress.

If you have questions about the ever-changing rules relating to Paycheck Protection loans and how to get loan forgiveness, we can help.


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