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PPP considerations for dealerships: Cash flow planning

Oct 27, 2020
By: Kevin Cherney
Dealerships

Since the Paycheck Protection Program (PPP) was launched to provide relief for struggling businesses in the wake of the COVID-19 pandemic, we’ve had a lot of discussion around what expenses qualify for forgiveness and reporting requirements. However, cash flow planning is something that should be on every dealership’s radar now — if you simply kick the can down the road, you could find yourself in a bind later. 

The IRS provided guidance that, for businesses spending loan proceeds on forgivable expenses such as rent and wages, those expenses cannot count as deductible business expenses. Some lawmakers have challenged that interpretation, but they have not yet addressed it by passing legislation. Under the current guidance, this presents a challenge for dealerships (and their tax advisors) to calculate quarterly estimated tax payments. 

Let’s break down potential scenarios: 

1. PPP loan forgiven

For dealers who receive debt forgiveness, those expenses will not qualify for deduction (assuming that the current guidance is correct and stands), resulting in more taxes owed. If quarterly estimates are not sufficient, you may have to come up with more cash to pay taxes. 

However, timing on this is not entirely clear. One possible position is that under the accrual method, a taxpayer did everything to earn forgiveness in 2020, even though final notification of forgiveness may not occur until 2021. This would result in the disallowed expenses affecting the 2020 tax return. 

Another possible position is that until forgiveness is granted, the expenses would remain deductible. This sounds simple enough, but if forgiveness is granted in 2021, how do you disallow 2020 expenses? An amended tax return may be an option, but that would still put the tax liability in 2020. 

2. PPP loan not forgiven

If a borrower doesn’t apply for forgiveness, repayment would begin, at the latest, 10 months following the end of the covered period. If a forgiveness application is submitted and the full amount isn’t forgiven, then repayment of the balance will begin after the SBA remits the forgiven portion to the lender. Terms of repayment will follow the loan agreement between you and your lender. 

So, what’s next?

There’s always possibility for future legislation — expenses could be allowed in full, or perhaps even greater scrutiny than anticipated could result in loans not being forgiven. 

Keeping these items in mind, as there’s not a blanket answer. Each business situation is unique, and you should consult your tax advisor for guidance. It’s important for dealerships to be proactive. Making a point to do some cash flow planning now could put you in a better position later. If you have questions, please contact me at kcherney@wipfli.com or 920 662 2860. 

Related content:

PPP loan forgiveness: Strategies for dealerships to consider as the clock winds down

How do I optimally allocate PPP loan funds for my dealership?

7 considerations for dealerships in partial or full shutdown

How dealers are faring in the wake of COVID-19

Author(s)

Kevin Cherney, CPA
Partner
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