Covid-19 Notice, updated on 5/4/2020
Hello! I hope everyone is staying healthy and is ready to get back to work soon!
When the CARES Act was passed, a number of my clients called me and asked me 2 very important questions:
- When will I get my Stimulus Check?
- Since it is a Forgivable Loan, should I go ahead and apply for the PPP loan?
Let me address these in order.
The IRS has been working remotely since the middle of March. This means that they do not have anyone in the office to answer the phones, not even the line dedicated to Tax Professionals. Therefore, I am unable to get an update on how fast the Stimulus Checks are going out. The last I heard, they are releasing the funds in waves (about every 2 weeks) and would finish sending out the funds to all eligible parties by the end of August.
Regarding the PPP loans, I have very rarely advised taking a loan out if it can be avoided, just on a personal level. While I understand that loans are occasionally necessary, I would prefer to raise funds some other way most of the time.
The PPP loan is forgivable, so long as 75% of the loaned amount is used for Payroll. The remaining 25% may be used for other business expenses.
On Friday, May 1st, the IRS issued guidance regarding the PPP. According to the IRS, if receive funds throught the PPP and the loan is forgiven, then the amount of that loan is not deductible as an expense on your 2020 tax return.
As an example, Karen owns a business that typically earns $250,000 in Gross Revenue. Karen is typically able to expense $200,000, about $100,000 of which is wages and payroll taxes, meaning she has taxable income of $50,000. During 2020, Karen took out a PPP loan for $50,000 and used it as instructed to qualify for forgivness. So when I prepare Karen’s 2020 tax return, she’s expecting to owe less taxes, since her Gross Revenue dropped to $175,000. Her expenses for 2020 were $150,000, however we have to lower her expenses by the $50,000 that was forgiven by the government. This means that Karen’s taxable income for 2020 will actually increase to $75,000.
The AICPA and NAEA have reached out to the IRS to try and get this overturned, but that may not happen. If you took this loan and have used it properly, please reach out to me so we can calculate new quarterly tax payments, especially since the 1st and 2nd quarterly payments will be due on July 15th this year.
Thank you and stay healthy.
Joe Davidson, EA
Welcome to Tax Advice Guys! We are a Southern California Tax Firm, specializing in helping Pastors and Small Businesses file their taxes. While we do specialize in Pastors and Small Businesses, we also assist all other types of individual and business returns, including individuals who have Rental Property, Purchase and Sell Stocks, Interest and Dividend Income, Social Security Income, Single Member LLC’s, S-Corps and much more.
As Enrolled Agents, we are authorized (with proper documentation) to represent you before the IRS or any state agency, should the need arise.