Do you know what’s the impact of the PPP loan on your 2020 Taxes?


October 7, 2020

Have you received your PPP?

I’m here to discuss the Paycheck Protection Program. Also, I will talk about the impacts of qualified business income tax later on. 

What are the impacts of PPP? 

About the PPP, we were going over the financials of one of our clients that ended up receiving the PPP loan or paycheck protection loan. And one of the things that you may not be aware of is, if you did receive the money for it, it’s to be counted as income. 

So on your profit loss, you’re going to see that it is actually recorded as income. And one of the other pieces which makes the loan super interesting is that any expenses – payroll, rent utilities, or a mortgage, that you would actually use the money for is not allowed by the law. 

The way the law is currently written, it doesn’t allow the business to use the money for your business’ expenses. 

So here’s what’s interesting, a client of ours ended up receiving, not a whole bunch, just a little over $20,000 or so. As they received Paycheck Protection money of about $20,000, what we realized is, when we added in that additional $20,000, the result was the tax bracket they are in went up.

Out of the $20,000 that it received, 80% of it is taxed. We’ve realized the impact of it on taxes. It increased their taxes by almost $16,000.

They’re only receiving four grand of that net as a direct result of that. So I thought that was pretty interesting to be able to go ahead and look at it from that perspective. 

We’re not going to be able to deduct any of the payroll or rent or anything like that. In fact, they had sent ahead and expanded from that. 

Consequently, I would highly recommend, if you haven’t already met with your CPA tax preparer, that you work with or consult with about your financials for your business. 

If you haven’t already got your numbers clear for quarter two or quarter three of this year, I would highly recommend, over the next couple of days, to look at the impact of what your tax liability is going to be.

Moreover, the next couple of months will not surprise you if you’re financially prepared for this. 

Tax Deduction Through QBI

The second thing I will explain is the tax cuts you can get from QBI. If you are a sole proprietorship or if you’re a business partnership on your taxes, you file a 1065 partnership. Or if you file an 1120 S for an S Corp, you will have a tax deduction.

That is because of the QBI or qualified business income tax calculation. It has actually helped a lot of people.

To further tell you about it without getting into the nitty-gritty of how this actually works, essentially if I’m on an S Corp after you’ve got revenue that comes in, you’ve got the cost of goods sold, overhead operating expenses, and so forth, you get your payroll. 

And when you get down to the bottom line, you’ve got what the company ended up netting, which is your net income. Well, when you look at your net income, the QBI or qualified business income, will have a calculation that says that you’ll get to go ahead and calculate roughly about 20 percent of whatever that was. 

You could go ahead and take as a tax deduction what is calculated within that is going to offset what your taxable income is.

As a result, a lot of people are really excited about it. It really is benefiting a lot of people under the current tax law and their current administration that we’ve gotten in place. And we’ve got about another year and a half to two years to continue to benefit from this. It is really awesome.

However, here’s the caveat I want you to be aware of. We were looking at this with one of our other clients, and we were figuring out kind of where they were actually going to be showing up here. What would be their tax liability towards the end of the year?

As we were getting it, kind of figuring it out, it ended up being at roughly about $70,000. They were super pumped that 70 grand is going to reduce their amount of taxable income in a big way. 

Here’s the part that was really surprising, we found out that it was over a certain income threshold. The QBI moves to an alternate qualified business calculation. 

Because of it, they will not be getting what they thought they were going to be getting, a whopping $70,000 as a qualified business deduction. 

The sad part is, it is not even close. It comes out closer to about $13,000. They’re really going to be receiving only less than 15 grand. 

Now, what they’re finding is that, roughly between state and federal taxes, they’re looking at well over a six-figure tax bill this year. That’s right. Over a hundred thousand dollars. Could you imagine writing a check for over a hundred thousand dollars between state and federal taxes? And while you were thinking that you’re going to get this sizable deduction yet, not a single chance. 

So they were super surprised at what ended up coming out. I, again, just want to encourage you to know your numbers. As I’ve already said, you gotta know what your percentage of labor is. You gotta know what your net profit is. You gotta know what your tax liability is and make sure that you’re preparing and handling your cash management accordingly throughout the month and throughout the quarter and so forth. 

And knowing where you’re going to hit by the end of this year, and you’re not caught surprised. 

Lastly, if you need help with your numbers and you’re behind. Or maybe you still haven’t filed 2019 yet. Just know the extension expired on September 15th. It’s getting really pricey as we go month by month. 

But if you need help getting that taken care of, or if you need a second opinion of taking a look at where you’re sitting with QuickBooks, I just want to encourage you to send me a message here

In addition, if you have any other questions about accounting and the likes, I am happy to help. You may send an email to support@simplebackoffice and we can set up a time that is convenient for you. 

Until next time! 

Chief Experience Officer

“Know Your Numbers, Know Your Business”