Paycheck Protection Loan: A Wolf in Sheep’s Clothing?

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If I had a dollar for every time I heard, “Nothing in life is free,” I would be a rich woman. It was a phrase that echoed in my head time and time again as we waded through the relief options offered to small businesses last spring in response to the pandemic. While my clients, and many small businesses like them, were scrambling to apply for relief before funds ran out, we were asking ourselves things like:

  • What will the implications be for those who receive Paycheck Protection Program funds?
  • Will they be able to afford to repay the PPP loans?
  • What if their businesses don’t recover and they have these large PPP loans to pay back?
  • If their Paycheck Protection Program loan is forgiven, will they have to pay tax on what is now considered taxable income?

If your small business received a Paycheck Protection Program package, specifically the forgivable Paycheck Protection loan, you will want to read on. In this article, I answer questions about PPP Loans and PPP Loan Forgiveness. I also explain what you can do to help ensure that the relief you received doesn’t become a burden.

What is the Paycheck Protection Loan?

The Paycheck Protection Loan is a Small Business Association (SBA) loan program to help small businesses with fewer than 500 employees borrow up to $10 million to cover payroll costs and a few other select expenses.The SBA granted the loans after businesses shut down last spring due to the pandemic. Borrowers would be eligible to apply for partial or full forgiveness of the loan at the end of an 8- or 24-week period if all funds were used per the terms of the loan.

Sounds Great! What’s the problem?

I understand that relief was needed quickly, and legislators had to act fast. But the news that resource availability was on a first-come, first-served basis, rather than a needs-based approach, created a panic. People signed up for relief packages with no fine print available until after the deal was done.

A hot topic today is the recent guidance provided by the IRS and the Treasury. They basically state that expenses paid with funds from the forgiven PPP loan will not be deductible expenses (Rev. Rul. 2020-27, Rev. Proc. 2020-51, Notice 2020-32). So, while they are not taxing the income that resulted from the forgiven loan, by not allowing the expenses to be deducted, they are essentially making the business owner pay tax on the forgiven amount of the loan anyhow.

Here is a simple illustration:

  Normal Year
with no Relief
Forgiven Loan Not
Taxable Expenses Paid
with Loan Proceeds
are NOT Deductible
Forgiven Loan Not
Taxable Expenses
Paid with Loan
Proceeds ARE
Revenue 1,500,000 1,500,000 1,500,000
Forgiven Loan Income   250,000 250,000
Deductible Expenses (1,000,000) (75,000)
(1 mil less disallowed 250,000 paid
with loan proceeds)
Gross Taxable Income 500,000 1,000,000 750,000
Less Non-Taxable
Loan Forgiveness
  (250,000) (250,000)
Net Taxable Income 500,000 750,000 500,000

Who’s Going to Bat for Us?

The American Institute of CPAs (AICPA) is going to bat for us by supporting the bill, S. 3612: Small Business Expense Protection Act of 2020, that was introduced on May 5, 2020. The organization is encouraging CPAs to support this bill by writing to their Congressional representatives. The purpose of this bill is “to clarify for purposes of the Internal Revenue Code of 1986 that receipt of coronavirus assistance does not affect the tax treatment of ordinary business expenses.”

What Can You Do to Support This Legislation?

If you own a small business and received relief funds through the Paycheck Protection Program, or if you know someone who owns a small business, please show your support by:

  1. Sharing this post
  2. Writing to Congress and asking legislators to support this bill. You can learn more about the bill and track its progress at

Why is PPP Loan Forgiveness So Important?

It has been a frustrating year in so many ways, to say the least. However, I would really be disheartened if my clients and other small business owners find themselves caught off-guard in an already difficult business environment. When they applied for PPP loans, small business owners thought the government had their best interest at heart. Sadly, that might not be the case. Businesses may be hit with huge tax bills they weren’t anticipating. Hopefully, I have given you every reason and every link you need to make sure that doesn’t happen. Please contact me for more information.

Find your elected officials and ask them to support Bill S. 3612 today!