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PPP loan taxation for Internal Medicine P.C.

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  • PPP loan taxation for Internal Medicine P.C.

    Our four doc internal medicine P.C. received a $180,000 PPP loan in spring which has since been forgiven. At end of fiscal year (Aug 31,2020) our accountant advised us not to drain our banking account to zero, as usual to avoid paying corporate taxes, because at that time we did not know if our loan would be forgiven. Now our accountant tells us we have a $32,000 tax liability. If we had paid the $180K out in bonuses or equipment purchases before Aug 31, would we still been liable for the tax?.

    Now I'm not ungrateful for the assistance that the government provided, but we did keep all of our employees working full time even during the early days of the pandemic when only a few patients would come in to our office.

    (Mods, feel free if you want to move this to another forum topic.)

  • #2
    Ouch, that hurts. Without seeing the books, no way to say from here but corporate rate is 21% federal + whatever state tax is, so the numbers line up. It also depends when it was forgiven. I'm not sure I understand the accountant's strategy. If you distribute the money and it's not forgiven, you book a loss (assuming the cash were distributed as payroll). You could still take a dividend with these earnings, but you'd be paying double taxation in the end. You'd have to ask them why. This seems like a big mistake.

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    • #3
      Originally posted by jhwkr542 View Post
      Ouch, that hurts. Without seeing the books, no way to say from here but corporate rate is 21% federal + whatever state tax is, so the numbers line up. It also depends when it was forgiven. I'm not sure I understand the accountant's strategy. If you distribute the money and it's not forgiven, you book a loss (assuming the cash were distributed as payroll). You could still take a dividend with these earnings, but you'd be paying double taxation in the end. You'd have to ask them why. This seems like a big mistake.
      Thanks, it may have been $37000 (0.21x180000=37,800). I may have misunderstood the amount of the tax.

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      • #4
        confirm you're a C corp?

        I have limited understanding of C corp taxation. But at this point don't you get to take those retained earnings out as dividend rather than wages?

        if that's the case you paid 21% fed tax and then likely 18.8 or 23.8% dividend tax.

        to determine your "loss" you would need to compare this, to your marginal ordinary income tax rate including FICA, had the funds been paid out as wages instead.

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        • #5
          Originally posted by jacoavlu View Post
          confirm you're a C corp?

          I have limited understanding of C corp taxation. But at this point don't you get to take those retained earnings out as dividend rather than wages?

          if that's the case you paid 21% fed tax and then likely 18.8 or 23.8% dividend tax.

          to determine your "loss" you would need to compare this, to your marginal ordinary income tax rate including FICA, had the funds been paid out as wages instead.
          Yes, we are a P.A. which in Alabama is the same as a P.C. So every year at the end of the fiscal year we have have showed zero net profit. The only money left in our accounts would be the profit sharing retirement money which apparently doesn't have to be distributed until December. I think the original wording of the PPP loan was to the effect that the money was non taxable. So that may have been the reason that the accountant showed a year end balance of the $180,000.

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          • #6
            Originally posted by Ykcor View Post

            Yes, we are a P.A. which in Alabama is the same as a P.C. So every year at the end of the fiscal year we have have showed zero net profit. The only money left in our accounts would be the profit sharing retirement money which apparently doesn't have to be distributed until December. I think the original wording of the PPP loan was to the effect that the money was non taxable. So that may have been the reason that the accountant showed a year end balance of the $180,000.
            a P.C. can be taxed as a C corp, or an S corp.

            If your practice is paying corporate tax then you're a C corp. That's less common than an S corp for small practices, in my limited experience.

            If you are a C corp then my next step would be confirming if my assumption of the tax ramifications is correct and if so, do the A vs B math to figure out how much this actually cost the shareholders.

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            • #7
              Originally posted by jacoavlu View Post

              a P.C. can be taxed as a C corp, or an S corp.

              If your practice is paying corporate tax then you're a C corp. That's less common than an S corp for small practices, in my limited experience.

              If you are a C corp then my next step would be confirming if my assumption of the tax ramifications is correct and if so, do the A vs B math to figure out how much this actually cost the shareholders.
              It is my understanding that we are a C corp. We never pay dividends. The doctors are paid salaries just like the employees. Excess profits are payed out in bonuses to the doctors based on productivity. The profit sharing retirement is the same percentage fo earnings fo employees as the physicians.

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              • #8
                Not up to speed. The IRS issued a ruling that the expenses paid with the PPP loan were non-deductible.

                https://www.irs.gov/pub/irs-drop/rr-20-27.pdf
                Push back was that disallowing the deduction, effectively made it taxable. IRS said, its the loan forgiveness that is non-taxable. No tax on income and no deduction on the expense.
                Of course there is blow back. https://www.journalofaccountancy.com...le-or-not.html
                Unfortunately the solution with be a bill amending the tax issue.

                That is the taxation issue. If someone has an IRS ruling or a bill that was passed, needs clarification.

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                • #9
                  Originally posted by Tim View Post
                  Not up to speed. The IRS issued a ruling that the expenses paid with the PPP loan were non-deductible.

                  https://www.irs.gov/pub/irs-drop/rr-20-27.pdf
                  Push back was that disallowing the deduction, effectively made it taxable. IRS said, its the loan forgiveness that is non-taxable. No tax on income and no deduction on the expense.
                  Of course there is blow back. https://www.journalofaccountancy.com...le-or-not.html
                  Unfortunately the solution with be a bill amending the tax issue.

                  That is the taxation issue. If someone has an IRS ruling or a bill that was passed, needs clarification.
                  our cpa says their contacts in IRS are advising a simpler approach which has the same result, include PPP loan amount in income, continue to deduct expenses as before. So that’s what we’re doing

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                  • #10
                    Originally posted by Ykcor View Post

                    Thanks, it may have been $37000 (0.21x180000=37,800). I may have misunderstood the amount of the tax.
                    Financials usually aren't as clean as that. AL adds 6.5% to that, so corporate rate for you is 27.5%. There may be other earnings/losses, depreciation/amortization, or prior year NOLs in there that will affect it. You'll need to talk with your accountant. It's annoying, but what would be distributed as wages now is subject to double taxation. 27.5%+15-20% vs your marginal income tax+payroll tax rate. Probably 5-10% error. Or you could keep the cash in the business as an asset instead of worrying about cash flowing the first month's expenses. Or by capital with it.

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                    • #11
                      Originally posted by jacoavlu View Post

                      our cpa says their contacts in IRS are advising a simpler approach which has the same result, include PPP loan amount in income, continue to deduct expenses as before. So that’s what we’re doing
                      Simpler, yes. Taxable yes. One of the stimulus bills might make it non-taxable as it was presented, PPP tax-free.

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                      • #12
                        Originally posted by Tim View Post

                        Simpler, yes. Taxable yes. One of the stimulus bills might make it non-taxable as it was presented, PPP tax-free.
                        so alternative advice would be what? Extend a return long as possible and hope for something different?

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                        • #13
                          Originally posted by jacoavlu View Post

                          so alternative advice would be what? Extend a return long as possible and hope for something different?
                          Not sure of course. It would take one line as an amendment. The problem is PPP has been "messaged" now as a corporate giveaway. Rather than money to employers to be paid to employees. This was a "political" message that seems difficult to overcome.

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                          • #14
                            Originally posted by jacoavlu View Post

                            our cpa says their contacts in IRS are advising a simpler approach which has the same result, include PPP loan amount in income, continue to deduct expenses as before. So that’s what we’re doing
                            Same.

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