On top of everything else MSPs need to worry about in2021, tax season is right around the corner.There’s been a lot of confusion over taxes this year, especially if you received a PPP loan last year.
A lightly edited transcript of our conversation follows.
Before sitting down with an accountant, what should an MSP gather?
Start with gathering your thoughts.Think about what it is that you want to accomplish during the sit down.Common meeting agenda items would be tax planning, audit/accuracy/general review, preparing for an event (financing or acquisition), cash flow planning, etc. In most circumstances, you want to share your current situation and history.An accountant will want to see the P&L statement, balance sheet, and cashflow statements for all relevant periods. Together, these documents will tell a story.It is important for business owners to fully understand these documents and what they represent.Their accuracy should be absolute.
What are the tax implications of a PPP loan?
In the U.S., the Payroll Protection Program was a part of the CARES Act of 2020.This program was intended to give small business access to tax free, forgivable loans to help offset revenue declines and maintain payroll and fixed expenses.These loans are now called “first draw PPP loans.” The majority ofthe IT managed services industry was eligible for this program.The original program has changed significantly since its introduction. While the original intent of the PPP loans was to be tax free, there is an IRS rule that prohibits the expenses paid for with forgiven loans to be deductible, thus decreasing the company’s expenses and increasing profits (or reducing net losses).As part of the COVID Stimulus Package signed in late December 2020, the IRS was overruled, and expenses paid for with PPP loan funds will be able to be deducted as qualified business expenses in 2020.
What if an MSP didn’t experience a significant drop in revenue?
Most MSPs qualified for and have had (or are in the process of having) their loans forgiven.In many (most) cases, the MSP ended up not experiencing the revenue loss feared and have a surplus of cash on their balance sheets.This creates a conundrum of what to do with this surplus.Some uses are the following: invest back into the business, keep as additional working capital, distribute to ownership, employee bonus programs, etc. What shouldn’t be done is squander this cash on frivolous non-core business/personal expenses or investments. We are still in the pandemic and great thought should be given to cash reserve strategies.
What should MSPs know about loan forgiveness?
Most MSPs who received PPP loans and have properly accounted for how the loans were used will qualify for forgiveness.Generally, loans under $2M have a straight–forward forgiveness process that is done through the lending institution.Like the PPP application process, the forgiveness process has been slow to roll out. Anyone who has a PPP loan which has not yet be forgiven should be in regular communications with the lending institution to find out when the process will be available.To date, we have not seen any PPP loan forgiveness requests be rejected.
Does a forgiven PPP loan become taxable income?
As discussed above, originally the loan was tax free, meaning it did not count as revenue.However, an IRS rule which prohibits the expenses paid with the forgiven loan to be deducted as qualified business expense.The result of this would be an increase in taxable income equal to the loan amount.This situation was addressed in the in the December 2020 stimulus package. The forgiven loan in not taxable and the expense deductions are allowed.
What about PPP 2.0?
A part of the December 2020 stimulus package is another round of PPP loans.These are intended to go to businesses significantly impacted by the pandemic. One of the criteria is a 25 percent decline in revenue which few MSPs experienced.
This article is intended to help MSPs gain perspective and is not intended as accounting advice. Be sure to consult with a CPA for expert advice on the accounting needs of your business.