How a PPP Loan Will Affect Your Business Taxes
More than 5 million companies took advantage of paycheck protection program repayable loans who were part of Coronavirus Aid, Relief and Economic Security Act (CARES). Recent changes to the program may have tax implications. Here’s what small business owners who have received a P3 loan should know before filing their 2020 taxes.
What was promised in the paycheck protection program?
As a result of the widespread closings, many small businesses have experienced drastically reduced footfall, declining revenues and, in many cases, potentially permanent shutdowns. In an effort to counter these problems, Congress passed the CARES Act as a multi-pronged stimulus package that included loans for struggling industries, an expansion of unemployment benefits, and billions in emergency grants.
The other major aspect of the CARES law that aimed to help entrepreneurs was the $ 350 billion earmarked for small businesses. Small Business Administration loans. Through congressional action, the PPP has attempted to help small businesses cover their wage costs and keep people working during the pandemic by providing up to 2.5 times their monthly payroll expenses, with a limit of $ 10 million per loan.
These are certain eligible expenses for PPP loan proceeds canceled:
- At least 60% of loan, up to $ 100,000 per employee, used for payroll
- Employees paid at their usual level throughout the eight or 24 week loan period
- Continuation of health benefits
- State and local compensatory taxes
- Other business costs, such as rent, mortgage interest, and utilities
Although the first batch of PPP loan products quickly dried up, PPP served as a liferaft for many small businesses. Last month, the SBA announced that another round of PPP funding would start with the new year. With $ 284 billion set aside for this latest iteration of the PPP, the program is expected to provide up to $ 2 million per loan to help each PPP borrower. This time around, applicants were limited to companies with 300 or fewer employees that could demonstrate a reduction of at least 25% in quarterly revenue year over year.
Here are some additional business expenses canceled thanks to the last cycle of PPP:
- Personal protective equipment (PPE)
- Property damage
How does the PPP affect taxes?
While the idea of receiving government funding without expecting to pay it back was a balm for small business owners, one area of confusion has been its potential impact on taxes. As the loans would be canceled, questions remained as to whether the forgiven amount would be considered taxable income and whether the expenses covered by the loan could be deducted. Although the PPP was seen as a lifeline, many experts warned that the original legislation could be a time bomb laden with taxes.
This confusion came to a head last May when the IRS published Notice 2020-32, who said that if canceled PPP loans were not taxable, expenses that would be considered a tax deduction in a normal year, such as rent and utilities, would not be deductible during the course of the year. tax year 2020.
The announcement effectively brought one of the most attractive parts of the PPP to its knees. When Congress passed the last round of PPP funding through the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA), he reversed the IRS ruling by declaring that a canceled PPP loan would be tax-exempt income. With this clarification from Congress, businesses can get a P3 loan while still benefiting from the Employee Retention Tax Credit (ERTC) for the 2020 and 2021 tax years.
What should you consider now?
While Congress has backed off the IRS’s stance on P3s and its relationship to deductible income, that doesn’t necessarily mean you can exclude those funds from the conversation about your 2020 taxes. Rafael Alvarez, Founder and CEO of A TAX, believes that whether you received PPP funding in its first iteration or later in 2020, you should still be careful about taxes.
“There are still a lot of unanswered questions,” Alvarez said. “What about the expenses the business owner paid with the P3?” If the income is fully tax exempt, shouldn’t the expenses be reported? There are many problems. “
Some of these problems, he said, stem from confusion in the PPP application process. In some cases, application issues meant companies were given money they weren’t qualified for in the first place. For example, a company could have declared that it had employees when it only had independent contractors. While this might seem like a semantic case to the layman, this kind of difference could have major implications when it comes to filing corporate taxes. It is also important to keep in mind how these funds were used.
“Any money that the business owner has used to pay for something else that is not included in the PPP requirements, he will have to report the amount as income and expenses on his tax return,” he said. Alvarez said.
Watch out for tax credits.
ERTC is an area that could be affected by PPP. While companies that get the PPP can still get the ERTC, the amount of credit you receive could change accordingly, said Jackie Meyer, Chartered Accountant and President and Founder of Meyer tax advice.
“The payroll calculations from the PPP loan cancellation affect the employee retention credit calculations,” she said. “You can’t use the same payroll costs in both calculations – they have to be different. “
Meyer also pointed out that if a company takes the ERTC in addition to the canceled loan, it is no longer allowed to take advantage of the Work Opportunities Tax Credit (WOTC).
See if your state considers your P3 loan as taxable income.
Although PPP loans are fully tax exempt at the federal level, be sure to check your state’s position on this. Although a number of states have taken steps to follow federal guidelines, your national and local taxes may be impacted.
According to the SBA, 21 states and Washington, DC, are “rolling compliance statements, which means they automatically comply with the most recent Internal Revenue Code (IRC) for personal and corporate income taxes.”
Some states, such as New Jersey, Mississippi, and Arkansas, have selective tax compliance, so you’ll need to check your local guidelines if you’re operating in one of those states. Massachusetts and Pennsylvania offer ongoing corporate income tax compliance, although Massachusetts has static compliance and Pennsylvania has selective personal income tax compliance.