Whether you got a PPP loan in 2020 or are in the process of getting one now (or both), it’s important to know how the loan will affect your business taxes. Understanding PPP tax implications can help you better manage your business financials and prepare for tax season. The IRS has pushed back the deadline for filing 2020 taxes to May 17, 2021. Here’s how the PPP can affect your taxes.
How does the PPP loan work?
The Paycheck Protection Program is back in action offering loans to qualified businesses, sole proprietors, and independent contractors who’ve been struggling after nearly a year of coronavirus-related challenges. The program is open now and will run through May 31, 2021. Here are some details:
- Who can apply? Qualified businesses that haven’t received a PPP loan can apply, as can previous PPP loan recipients who meet certain criteria.
- What’s the loan for? PPP loans are designed to help businesses cover payroll costs for a period of up to eight weeks.
- How much money can you get? Most qualified businesses can receive 2.5 times their average monthly payroll costs (calculated based on your 2019 or 2020 average payroll) up to $2 million.
- Do you have to pay the loan back? Businesses can get their loans 100% forgiven as long as they use at least 60% of the money on payroll costs.
- How can you use the money? You can allocate the remaining 40% of your loan to mortgage interest, rent, utilities, operations expenditures, property damage costs, supplier costs, and worker protection expenses.
Is the PPP loan taxed?
If your PPP loan is partially or fully forgiven, the forgiven amount won’t count as part of your business’s gross income, which means you won’t have to pay taxes on it.
Are PPP business expenses deductible?
Yes. If you use your PPP money to pay for business expenses like rent and operations expenditures, you can write those off come tax time. The new provisions state that any business expenses paid with a forgiven PPP loan that are normally deductible will be tax deductible. This applies to past and current PPP loans.
This wasn’t the case in the first iteration of the PPP, but Congress changed the legislation in December 2020 to ease the tax burden on businesses. Your business’s tax assets and attributes also won’t be reduced as a result of your loan forgiveness.
Tax-deductible expenses could include:
- Mortgage interest
- Operations expenditures, such as software upgrades or HR and accounting needs
- Property damage costs not covered by insurance, such as new window treatments or signage
- Supplier costs, such as purchase orders or orders for goods
- Worker protection expenditures, such as personal protective equipment or air filtration systems
What about the EIDL grant?
If you received an Economic Injury Disaster Loan (EIDL) through the SBA, you won’t have to pay taxes on it. The grant money doesn’t count as part of your taxable income.
Does my business qualify for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) was established under the CARES Act to encourage business owners to keep their employees on payroll. As of December 2020, you can use a PPP loan and take advantage of the ERTC for either your 2020 or 2021 business taxes—as long as you don’t use the PPP and ERTC to cover the same payroll expenses.
To be eligible for the tax credit, your business must have fewer than 500 employees and have either:
- Experienced at least a 20% decline in gross revenue from any quarter in 2020 when compared to the same quarter in 2019 or
- Had to partially or fully suspend your business operations in 2020 or 2021 because of a coronavirus-related government order
Initially, employers who maintained their payroll could receive a 50% tax credit per employee—up to $10,000—on wages paid between March 20, 2020 and January 1, 2021. That meant employers could receive a maximum of $5,000 in credit per employee for all of 2020.
The terms have since changed to give business owners more leeway. Employers can now take a 70% credit of up to $10,000 in wages paid per employee per quarter. In other words, employers can get a maximum $14,000 tax credit per employee from January 1, 2021 through June 30, 2021.
Can I defer payroll taxes?
Yes. Under the CARES Act, employers can defer their payroll taxes from March 27, 2020 through December 31, 2020, even if your PPP loan has been forgiven. You have to pay 50% of your deferred taxes from 2020 by December 31, 2021 and the other 50% by December 31, 2022.
Consult your accountant
If you’ve already received a PPP loan or are applying for one for the first time, make sure you talk to your business accountant about the tax consequences. A tax professional can help you navigate the process more easily and keep track of the correct paperwork.
For more articles and podcasts about PPP loans, please search for PPP in Fundbox Resources.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.