The IRS released notice 2020-32 that clarified what many of us in tax and accounting field expected. Expenses that would otherwise be deductible in your business will be non-deductible to the extent they are used to qualify for loan forgiveness.
For an example, let’s say I have a $50,000 PPP loan and 100% of it is forgiven based on qualifying expenses including payroll, rent, utilities, or mortgage interest. Those $50,000 of qualifying expenses will no longer be deductible on your income tax return, which will create $50,000 in additional taxable income.
If a client is in the 24% federal bracket and a 7% state bracket, that would result in 31% additional taxable income from loan forgiveness, or $15,500. Ironically, you have to spend all of the $50,000 PPP loan to get it forgiven, so you will need to set aside dollars from other income to cover the additional liability.
Better to know now and plan ahead!