Many business owners who faced enormous stresses during the COVID-19 pandemic took a forgivable loan under the federal Paycheck Protection Program to help them meet their business expenses.

Now, as they plan for their 2020 income tax returns, they are faced with decisions on whether to deduct those expenses, even if they haven’t yet applied for loan forgiveness.

The confusion has left small business owners who took the PPP uncertain if they should deduct the business payroll benefit they received in order to qualify for forgiveness. While the loan forgiveness itself is tax-free, the business expenses covered by the loan are not deductible, according to the Internal Revenue Service.

However, by not deducting payroll costs, the business will show higher income that could result in higher income taxes.

Another factor that’s muddying the water is that a business probably won’t know if it’s getting forgiveness before the end of the year. Some tax experts advise that owners treat the expenses as non-deductible – better to overpay, then owe money, they suggest.

The lack of clarity is worsened because Congress has indicated that they intended for the business deductions to be fully deductible.  However, they have yet to fully address the deductibility issue.  Financial institutions are also taking a wait-and-see approach.

So, as the matter remains in flux, business owners need to ask themselves how much risk they can tolerate. If legislators don’t take action, those who choose to deduct business expenses covered by the PPP could owe taxes if the loan ends up being forgiven.

As always, it’s wise to consult your tax advisor at Diamond & Associates, PC CPAs to assess your particular situation. We are here to help!