Accountants who helped shepherd businesses through the process of obtaining federal Paycheck Protection Program loans this year are now cautioning them to not assume it will go untaxed.
Among the many questions so far this tax year is whether any portion of the PPP proceeds are going to be subject to taxes, according to Rhode Island accountants.
Other issues are more straightforward.
Millions of Americans, along with thousands of Rhode Islanders, are now working from their homes, racking up bigger electricity bills and using their own office furniture and computers. But if they are employees – paid with W-2s – they cannot declare a home-office deduction for expenses incurred on behalf of work, even if their offices remain closed.
Under tax law, only people who work as independent contractors or for themselves can claim a home-office deduction, according to David Shepherd, a certified public accountant and owner of David J. Shepherd CPA LLC in Cumberland.
“If you’re a W-2 employee, you can’t claim home office,” he said.
But there is some relief allowed for employees who are now largely working from home. They can still file for business-related expenses, he said, including travel expenses (outside of commuting) and work-related meals if they are ordinary and necessary, he said.
‘This is how we’re going to spend the next two months, if not longer.’
ANTHONY SCORPIO, Mullen Scorpio Cerilli partner
For businesses that spent money on personal protective equipment or cleaning products, or made improvements to their facilities relating to the COVID-19 pandemic, the accounting is also straightforward.
All would be considered reasonable business expenses, according to Anthony Scorpio, a partner at Providence-based Mullen Scorpio Cerilli.
Scorpio, whose firm represents a large number of restaurants, said many have spent substantial amounts of money converting sidewalks or parking lots into dining areas in the pandemic. All of those planters, screenings and other investments are business expenses. “We’re just writing those off,” he said.
But one of the issues that has become complex, he said, in addition to the PPP tax question, is where people are working. If an employee works for a Rhode Island company but has been working from home in another state, such as Connecticut or Massachusetts, should they still be paying income taxes to the state of Rhode Island?
“There is discussion going on about that,” Scorpio said. The individual would get a credit for the taxes paid to Rhode Island from their own state. But the state of Rhode Island would lose that money.
For employees who work from home, they cannot deduct a home office as an expense. “The government hasn’t changed anything on that yet, and I think we’re waiting for guidance,” Scorpio said.
Probably the biggest unknown for accountants is the issue of the taxation of PPP proceeds.
The money wasn’t intended to be taxed when Congress approved the program, according to Joseph A. Mansour Jr., president of Marcovich, Mansour & Capobianco LLC in Lincoln.
The Coronavirus Aid, Relief, and Economic Security Act stated that the PPP loan recipient would not have taxable income if the loan was forgiven, he said. But a few months later, the IRS issued a notice, 2020-32, which effectively reversed that benefit because it prohibits businesses from deducting expenses such as payroll, rent and utilities.
“Those expenses are not deductible,” Mansour said. And if that stands, many businesses could be on the hook for thousands of dollars in taxes. Although the U.S. Treasury Department has been trying to clarify the issue in another stimulus act, the holdup of a new relief package in the weeks before the general election has left the issue unresolved.
Mansour, whose firm represents about 400 businesses that obtained the PPP loans, said he’s advising clients to hang on to some of the money, if possible, in case they have to pay a tax in April 2021. Many of his clients, he said, are owners of Dunkin’ franchises. “They all received PPP loans,” he said. “This is going to create, if it’s not taken care of … a substantial amount of unintended, taxable income.”
The issue will have to be resolved, said Scorpio, who is waiting until he gets clear direction. It’s been a source of concern for business owners, many of whom are approaching the end of their 24-week window to spend the PPP loan.
“I think that’s a big TBD [to be determined] right now,” with substantial tax implications for business owners, he said.
“The implication is they’re going to pay taxes,” Scorpio said. “They didn’t make any profit on that [PPP] money. They used it to pay their employees. So the individual business owner is going to end up paying taxes on that money and they don’t have the money anymore to pay the taxes with because they spent it all on getting the fulfillment of the loan.”
The other outstanding issue, Scorpio noted, is when the PPP loans are forgiven. Is the IRS going to recognize that in 2020, when the funds were dispersed and used, or in 2021, when many banks may end up processing the loan-forgiveness applications?
“This is how we’re going to spend the next two months, if not longer,” he said. “We’re going to do what we do with any income or expense at the end of the year. Do you want to push it into next year or take it this year?”
The election, and the potential for tax changes in 2021, also weigh on that.
“I think there are going to be more extensions than normal in 2020 until we get some clarity, and what effect all of this is going to have,” Scorpio said.
Mary MacDonald is a PBN staff writer. Contact her at Macdonald@PBN.com.
