Tax Probably Owed on Paycheck Protection Program Loan

Question: My husband and I are the owners of a real estate brokerage firm in the East Valley. In June we received a $100,000 loan from our bank under the federal government’s Paycheck Protection Program (“PPP”) for struggling businesses. We used this $100,000 loan for business expenses, including the salaries of our employees. If we have complied with the PPP requirements, our understanding is that we will never have to pay the $100,000 PPP loan back to our bank. My husband took one accounting course in college, however, and he thinks that, even if we don’t have to pay the $100,000 PPP loan back to the bank, we will have to pay tax on the $100,000 PPP loan. Will there be tax owed by our real estate brokerage firm because of our $100,000 PPP loan?

Answer: Probably. Under the terms of the PPP, if you have spent the $100,000 from the PPP loan for payroll and other business expenses, the deduction for business expenses on the 2020 tax return of your real estate brokerage firm will decrease by $100,000. The result is that, as a practical matter, there will be additional taxable income of $100,000. The amount of the tax owed to the IRS on the 2020 tax return of your real estate brokerage firm will depend on its tax bracket.

Note: The PPP could be amended by the federal government to avoid PPP loans resulting in taxable income.