Image via flickr user Jernej Furman
Written by Breanna Hardy
Business owners have used Paycheck Protection Program relief on payroll, utilities and other essential expenses — as mandated by the U.S. Small Business Administration — in good faith in order to have their loans forgiven with no problems. But now they’re going to be taxed on thousands to millions of dollars in the coming months.
“As of right now, if you have a reasonable expectation that your PPP loan is going to be forgiven, then you are not allowed to take a deduction from those related expenses on your 2020 tax return. So essentially, it is taxable for 2020,” said Cassidy Jakovickas, CPA at MBS Accountancy Corp. in Fresno.
“A big thing I’m hearing is, ‘Man, that’s not how they said it was going to be,’” Jakovickas added.
With Congress passing another Covid-19 relief package with an additional $300 billion earmarked for the Paycheck Protection Program, small business owners that need the help should probably know what they are getting themselves into.
Jakovickas is building these expenses into his clients’ tax plans for the coming months and planning for the worst. Best case scenario — businesses find themselves in a better spot come tax season. But for now, CPAs are helping businesses buckle down.
“As a business owner if you’re not prepared for this, you’re probably really freaking out,” he said. “If you are prepared for this, then you’ve already started to make a plan.”
Business owners noted the speed of the program’s rollout — with plenty of miscommunication along the way.
Jeff Bennett, owner of Ampersand Ice Cream and The Revue Coffee Shop in Fresno, said the biggest frustration has been “lack of communication and transparency to the program.”
“We took the PPP because it happened so quickly,” Bennett said.
At first, shelter-in-place wasn’t defined — no one knew what it meant. The uncertainty caused many businesses to take the money.
Bennett said at first, there was a lot of information thrown at businesses, including how to use the money.
“There really wasn’t a clear, concise message,” Bennett said.
His role as a business owner has shifted to mostly administrative. He dedicates at least a couple hours a week to following up with his bank and CPA. That’s on top of following the ever-changing business guidelines.
“It’s hard as a business owner to make those adjustments,” he said.
Loan forgiveness is just another added layer of uncertainty for Bennett. He says he might have spent the money differently if he knew loan forgiveness wasn’t going to be as simple as once promised.
“That PPP money — I still haven’t received anything about forgiveness. That money was spent six months ago,” Bennett said.
Some banks are waiting for a final declaration for forgiveness processes, and Bennett says from a business standpoint, there’s not been a hard timeframe set for loan forgiveness.
While he says it’s been a challenging year, both his businesses have been able to weather adjustments and shift their business models.
When businesses first applied for the PPP loan, some faced rejection because they didn’t make the cutoff, or the banks were tapped out.
He hopes there is more relief to come, but he isn’t in need of dire relief himself.
“I know there are businesses out there that have been way more impacted than we have,” Bennett said.
“Other people are extremely frustrated and freaked out about how they’re going to cover the bill, and rightfully so,” Jakovickas said.
Businesses depend on staying open to cover their bills, but they’ve been shut down again as of Dec. 5, making it especially difficult for the restaurant industry. Meanwhile, lawmakers hope to finalize a new round of Covid relief, a proposed $908 billion, by the end of the week on Dec. 11. The new relief would designate another segment for the PPP.
“Everybody’s looking for those expenses to be deductible,” said Frank Hambalek, CPA and partner at Wiebe Hinton Hambalek in Fresno.
The recipient certifies that they will spend it on the payroll, rent, utilities or qualifying business expenses.
Hambalek expressed his clients’ concerns over bearing the weight of those expenses. Depending on the amount businesses have received in PPP loans, taxable income will be raised to a much higher number.
“Now there’s a fiscal impact to the recipient,” Hambalek said.
There’s still a curiosity regarding whether or not the IRS will change its guidance in the coming months, but both Jakovickas and Hambalek said businesses aren’t in a position to be waiting for decisions to be made. They need to make a plan now.
“Currently the way the IRS guidance is written is that it would not be deductible, therefore it increases your taxable income,” Hambalek said.
However, Hambalek cited encouraging news, in which Speaker of the House Rep. Nancy Pelosi hinted at a possible extender bill. But he says she was vague in her announcement.
“I don’t want to give any false hope; there’s just a chance that something may happen with respect to those expenses not being deductible between now and the end of the year,” Hambalek said.
But Hambalek reiterated that handling the upcoming tax season is not as much of a concern as shutting down nonessential business again. They’re just trying to manage one thing at a time.
On the other hand, there’s a little more hope in the atmosphere now that the vaccine is getting ready for dispersal. There’s not as much uncertainty about how to operate a business amidst Covid. People are more comfortable with social distancing, and there’s a level of predictability in the “new normal” post-pandemic — except for back-and-forth shutdowns.
“Six to eight months ago, we had no idea what was ahead of us,” Bennett said, “You went to every shopping center and the parking lots were empty. Now we’re at a spot where there’s more predictability.”
Bennett said with this second shutdown in the San Joaquin Valley, Ampersand is joining DoorDash, in addition to offering carryout. While he didn’t originally want to use the delivery app, he said it’s just another way to operate his business under the restrictions.
“I think we all as a society have adjusted,” Bennett said about shelter-in-place.
Until real clarity comes, Hambalek encourages businesses to manage expenses and make a budget for the end of the year and into 2021.
“Continue to revisit that budget as new laws for restrictions come into place, and make a list of contingencies of things that they need to do in case things get dire,” Hambalek said. “Be prepared. Don’t wait or bury your head in the sand. Make a plan, and be prepared to execute some tough decisions that need to be made.”
Jakovickas said he’s helping his clients prepare for the worst, but hope for the best. The businesses that depend on groups of people gathering seem to struggle the most, even with PPP relief.
The most people can do right now is hope that legislation overrules the IRS in its current ruling for PPP relief. But it’s a compounding effect for businesses — taking on debt with a loan, depleting revenue and paying a thick tax bill on a loan business owners thought wouldn’t have consequences.
“How can you run a business when you don’t know what the rules are going to be?” Jakovickas said.