Congress did it. As part of the recently passed Stimulus Bill, expenses paid with your PPP loan and EIDL Advance (that would also now be forgivable thanks to this bill) are fully deductible. This bill supersedes prior announcements made by the IRS to the contrary.
And President Trump signed this bill into law on Sunday night. For that reason, practice owners should move forward based on their being able to deduct staff expenses and facility costs paid with the PPP Loan and EIDL Advance that will be forgiven.
Strategy for S-Corps:
If you operate your practice as an S-Corp, you need to be careful of a potential tax pitfall caused by the timing of when your PPP Loan will be forgiven. If your PPP Loan isn’t forgiven until 2021, you might not have sufficient “basis” until 2021 to claim 2020 losses or take S-Corp distributions of up to the combined total of the PPP Loan and EIDL Advance, especially if your practice has other debts outstanding.
Yes, confusing stuff. If you end up with 2020 losses that will be disallowed this year, that shouldn’t be a huge deal. You will just claim those losses next year when your PPP Loan and EIDL Advance are forgiven. And if tax rates increase next year under Biden, you might even end up a little ahead.
The major tax trap applies to S-Corporations that pay out S-Corp Distributions to their owners over and above their salaries. If the distributions paid exceed a certain threshold that vary by each specific office, practice owners might find themselves subject to capital gains taxes on those excess distributions this year that they may not recoup until such time that they sell their shares many years down the road.
For S-Corps that pay out distributions to the owners, here are the steps we are suggesting you take as the year winds down, unless your PPP Loan will have been forgiven by 12/31/20:
- Hold off taking any year-end distributions until after 1/1/21
- Consider repaying distributions taken during 2020, and then pay them out to you after 1/1/21
- Target the combined ending balances in your practice bank accounts at 12/31/20 to be higher than the 12/31/19 combined balances by the amount of the PPP Loan and EIDL Advance
We’ll continue to keep you posted to new PPP developments as they arise.