The Coronavirus pandemic has caused Congress to act rapidly with loans, grants and rule changes designed to fund necessary heath and local government programs, stimulate the economy and, for good measure, to fund a few pet projects.
When it comes to the loans, grants and tax law changes, they were passed rapidly and often without a lot of guidance. And now here come all the interpretations and procedural changes.
That has happened several times already to the most popular SBA loans like the Paycheck Protection Plan (PPP) that was given to just March 27, 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). Done right, the loan can also become a grant you don’t need to pay back.
Congress even gave us an added incentive. The loan that could become a grant was also tax free.
CoronaTax: Free Money! New Opportunities! explains how the program works, as envisioned by Congress.
What’s better than a bail-out loan? How about a loan that you don’t have to pay back? In other words, it’s a grant or subsidy.
Under a separate section of CARES, the process for forgiving the Paycheck Protection Plan loan is spelled out.
Even better, it’s tax free. That’s right. If you follow these rules, you’ll have a tax-free grant at least at the federal level. States may treat loan forgiveness as taxable income.
Here’s how it works.
The amount that can be forgiven is the sum of the following that were paid during the 8 weeks following the date of the loan. The items to be totaled are:
- Payroll costs (as previously defined),
- Mortgage interest,
- Rent, and
- Certain utility payments.
The “tax free grant” clause for the PPP loan sounds like you can get a grant by proving you spent the money in an authorized way. And you don’t have to pay tax on it. Sounds pretty good!
Let’s stop there for just a minute. Normally, a loan that is forgiven is called cancellation of debt (COD). If your credit card balance is forgiven, that’s COD. If your car loan is forgiven, that’s COD. If you renegotiate a debt so that you don’t have to pay all of the debt, the part of your debt that is forgiven is COD.
COD income, the amount of a loan that does not need to be repaid, is generally taxable. There are a few exceptions and you need to file a complicated form (Form 982) in order to get forgiveness from the tax. In case of a loan like this, though, there are no exceptions. If a loan is written off, you normally would pay tax on it
Let’s take a look at how that might work, based on what Congress has said.
Normal company income $ 250,000
Expenses $ 150,000
Net taxable income $ 100,000
If you received taxable COD income of $50,000, your net taxable income would be $150,000. If you received tax-free COD income of $50,000, you’d have taxable income of just $100,000.
That all made sense, at least based on what it seems like Congress was saying.
But then, on April 30, 2020, the IRS issued Notice 2020-32 to clarify their position. They stated that PPP recipients could not claim a deduction for expenses that were funded from the PPP loan/grant amount.
So, now let’s go back to that example and say that your business received $50,000 in a PPP loan and you spent $50,000 within 8 weeks as called for in the requirements. The IRS has said, “Fine, the grant is not taxable. BUT you now have to subtract $50,000 worth of deductions. “
Your taxable income would now be $150,000. That’s because you just lost the deductibility of $50,000 of your expenses. Instead of adding $50,000 in COD income, you are adding back $50,000 worth of deductions.
Congress said that’s not what they meant in a May 5, 2020 letter to Treasury Secretary Steven Mnuchin.
Tax strategies are always evolving, but now they seem to be moving even more rapidly than normal.
CoronaTax: Free Money! New Opportunities! addresses that with a unique solution.
They are giving grants and loans to special economic sectors. (And, no, it’s not just big business or crony capitalism.) These laws have presented new tax strategies we can use to weather the pandemic and evolve our businesses. And, that all adds up to opportunity!
I do have a warning, though. This book is being written right in the middle of the changes. We know that there will be new law, amended law and Tax Court cases to further define what these new laws mean.
In other words, what you read now, might not be the best answer for you in a few months.
So that’s why I’m doing something that is unheard-of in our industry.
If you immediately buy a course to learn about how these new laws impact you, as rapidly as they have been released, you’ll usually pay about $100. And then when it’s out of date due to updates, you have to pay another $100 for the updates.
By buying this book you already know you spent a lot less than $100. And, there’s more. You get all the updates for FREE.
The one thing that’s certain with tax law is change. And now, with concerns about a stalling economy, unemployment and stagnant growth, tax law is rapidly being enacted without a lot of clear definition. We’re going to see change like never before.
You need to keep up-to-date, and in cases like this, as with the tax-free/maybe taxable grant money, don’t assume anything is certain today. More than ever, this is the time to stay current with current information.
