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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!

IRS NOTICE LINK