PPP & Economy Injury Disaster Loan — Oh My!

You have likely heard the ancient Chinese curse “May you live in interesting times”. Actually, it is not an old ancient Chinese curse, but an English expression used by British Ambassadors to China. The nearest related Chinese expression translates to “Better to be a dog in times of tranquility than a human in times of chaos.” Nothing describes life for humans better than a time of chaos.

We are living in an uncertain time with the globe struggling with the pandemic, affecting everyone’s life. While real estate professionals have thrived during this time, not needing any assistance with the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) and Economy Injury Disaster Loan (EILD), others sought relief. No matter what you choose, planning creates more opportunities.

The need to control and manage our cash flow is critical during these interesting times. You should never leave more money with your estimated tax payments than is necessary to meet your expected tax obligation. The taxing agencies don’t really appreciate your interest free loan to them. I have some clients who pride themselves on taking their annual vacation with the refunds from their tax refund. However, the IRS recommends that you should not use your tax refund as a savings account especially when identify theft occurs often.

Should your business produce less profit this year, you may want to timely review your estimated tax payments so you can adjust your 4th quarter amounts and keep more of your cash. As always, you should ensure that you pay the correct amount of estimated tax payments to avoid additional penalties and interest.

Alert! Unexpected results may occur for those people who receive PPP loan forgiveness! Yes, the PPP funds forgiven will be exempt from tax. The current IRS position is that the expenditures used by those funds will not be included in deductible business expenses. Many people receiving PPP forgiveness may see their taxable income go up because their deductible expenditures have declined. With this result, one may have higher amount of taxes than initially anticipated. This is an activity that you should be measuring and controlling as a good business practice.

Alert! Anyone receiving unemployment benefits should recognize that the state governments will issue a 1099 G reporting these benefits as income. The state agencies usually do not withhold an estimated tax payment on these benefits, but they are taxable. You may be accumulating a large amount of tax amount obligation which you would have to make an estimated tax payment to avoid penalties and interest.

Uncertain times continue. How long will the lockdowns continue? What is the tax impact of the assistance received from the government? We recommend that businesses and individuals examine their tax position each year, especially regarding their payments towards their tax obligation. We provide a process to estimate and forecast your tax obligation payment. Amazingly, it can be used to project your tax payment forwards for several years and can be adjusted for expected decisions. How powerful is that in deciding to see the cash impact on your taxes before you do? I would say it is truly powerful!

We want you to have this power to control your cash payments towards your tax obligations. Join us for our weekly Community Q&A on Thursdays beginning 10AM MDT to learn more.