AUSTIN (KXAN) — There’s mounting concern that a federal loan meant to be a lifeline for small businesses during the pandemic will end up becoming a tax problem for those it was supposed to help.
In late November, the U.S. Treasury Department and Internal Revenue Service issued a release, saying because proceeds from a forgiven PPP loan are not taxed, the expenses are not deductible.
That means things like payroll and rent, says Austin tax accountant George Dimov, owner of Dimov Tax Specialists.
“Let’s say now all of a sudden you cannot deduct this money that you spent on your payroll; this is something that people are budgeting to be able to deduct, and they make decisions accordingly,” Dimov said. “The whole purpose was to protect paychecks, and that’s what it was called, the paycheck protection program.”
“We haven’t been able to open for lunch just because of the lack of desire,” said Monte Sheffield, who owns Palmer’s Restaurant Bar & Courtyard in San Marcos.
Before March, he says he was seeing a year-over-year increase.
“Business was excellent,” he said.
At one point, Sheffield’s staff went from 41 to three, and he says even that was hard to maintain.
“We just were doing what we could, and we decided to go for the PPP loan,” he explained.
He says at the time—and even up until Tuesday—his bank told him they weren’t sure what the payback was.
He says at the time, many businesses were also just focused on staying alive—not trying to figure out the potential taxes on their loans.
“So, you have this situation where people didn’t budget for this and didn’t really think this through, necessarily,” Dimov explained.
Dimov says to take a small business for example that made $100,000, which would be taxed under the 24% bracket. If that business used its $18,000 of PPP money on payroll, they may end up owing the government roughly more than $4,300.
The numbers would fluctuate based on the business’ tax bracket, the amount of the loan and what that loan was used for.
“That additional taxes that that person may… have due, may be the only money that they have leftover from running the business,” Dimov said.
For small business owners, that may be money they had originally budgeted to live off of.
Dimov says there’s still a chance that the IRS ruling could be reversed, particularly once there is a change in administration.
“I really hope they do, not only for my own business, but also for tons of clients of mine that would significantly benefit from being able to deduct payroll and expenses that they spent their PPP funds on,” he said.
But he advises business owners to sit down with their accountants to plan for the worst, just in case.
Sheffield says he’s working with his bank to figure out his bottom line.
Meanwhile, he’s hoping customers keep coming back.
“We are doing what we can to make it exciting so when people do want to come out to eat to our place, it’s going to be very much appreciated, and it’s going to be an experience they won’t get anywhere else,” he said.
The federal agencies say if a PPP loan was expected to be forgiven and it is not, businesses will be able to deduct those expenses.
Dimov also encourages business owners to file for forgiveness.