In March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is more than just a law – it is a commitment to small businesses across the U.S. that are suffering from the impact of COVID-19. Through the CARES Act, small businesses were allowed to take out loans that promise low-interest rates and partial or complete forgiveness.
The most sought-after of these loans was the Paycheck Protection Program or PPP loan. The PPP loan offers small businesses with a loan equal to 2.5 times their monthly payroll requirements. If the small business uses the money to pay payroll or rehire employees, the loan amount would be forgiven. Millions of small business owners applied for and received, loan funds.
While the PPP is a program tailored to small businesses, a subsequent announcement from the Internal Revenue Service (IRS) challenges the entire goal of the PPP program. In April, the IRS announced that small businesses that receive a PPP loan will not be able to deduct those expenses paid on their upcoming tax return. That means that small businesses would not be able to deduct expenses routinely deducted, such as payroll and rent.
The PPP program was designed by Congress to be helpful, and the idea was that these loans would not count as taxable income. Not being able to deduct these expenses could lead some small businesses into a further state of financial despair. Similarly, businesses that have bounced back from the economic strain could find themselves back in financial trouble.
Businesses whose tax burdens are increased due to the CARES Act may find themselves on the brink of bankruptcy when it is time to file this year’s taxes.
What can you do?
If you are a small business at risk of bankruptcy due to a PPP loan impacting your tax burden, you may find it helpful to speak with an attorney about your rights and the best options to stay financially secure. You can also take action by contacting local or state lawmakers to express how the IRS’ decision could negatively impact your business.