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The upcoming tax season may prove challenging for small-business owners who received the Paycheck Protection Program (PPP) loan.

While the $2.2 trillion worth of aid the CARES Act distributed this summer helped struggling entrepreneurs stay afloat during the COVID-19 pandemic, the loans came with added tax complexities that could cause trouble in the months ahead.

The most pressing issue for businesses to solve is whether or not the expenses they paid with their forgivable PPP loan can be deducted from their 2020 taxes.

This comes as a shock for many, as when the federal government first established the PPP, the law stated that any loan forgiveness would not count toward the borrower’s taxable income.

However, the IRS has since issued Notice 2020-32. This notice dictates that expenses paid for with forgivable PPP loan money will not be tax deductible.

Tax Breaks with the PPP Loan

Fortunately, there are those who are lobbying Congress to rectify the situation. In the meantime, the small-business community has other tax challenges to overcome—namely, complying with other tax code changes pertaining to the PPP.

There are a number of challenges in meeting all of the compliance provisions of the CARES Act. For instance, those who received PPP loan money are barred from receiving Employee Retention Credit, whether or not their loan is forgiven.

While potentially overwhelming, small-business owners should continue their efforts to receive the tax breaks they are due. Each taxpayer’s situation is different, so dealing directly with a tax professional, who can advise on how the CARES Act interacts with their unique circumstances and the tax code, is the wisest decision entrepreneurs can make this season.

Prepare for Meeting with Your Tax Professional

If you have never met with a tax professional, now is the year to do so. To make the most of your meeting, go ahead and plan out the following:

  • Organize your records. As we previously discussed, keeping a solid record of expenses paid with your PPP loan will be immensely helpful to your tax professional.
  • Don’t make the most common mistakes. Double- and triple-check that this year of all years, you do not commit the biggest mistakes made by small businesses in tax season. Such mistakes include:
    • Waiting until the last minute to file
    • Not tracking your expenses accurately
    • Not separating business and personal expenses
    • Over- or underreporting your income
  • Make note of changes in ownership. If you lost or gained a business partner this year, you will absolutely need to inform your tax preparer. Changes in ownership can be associated with delicate tax ordinances, so bring this up to your tax professional immediately.

Ultimately, the 2020 tax season will come with its fair share of complications, especially for those who received PPP aid. Begin preparing now so that come April, you and your business will be ahead of the curve. Contact CREDO to set up a time to discuss your business’ unique needs today.

Dan Lucas
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