The last year has been monumental to say the least. Life as we once knew it was a thing of the past, for both individuals and companies. As countless companies struggled to adapt to the unforeseen challenges of the pandemic, Paycheck Protection Program (PPP), part of the CARES Act, was a lifeline for many.
The PPP loan program was intended to help small businesses, although many large companies have benefited as well. According to the Small Business Administration, over 5 million PPP loans have been approved, the majority of which went to small businesses. Ninety-two percent of the loans granted were $ 250,000 or less and 87% were less than $ 150,000. The average loan size was $ 100,729.
Many companies needed the money to keep their employees running and to pay for the daily expenses to keep the business open. Business owners were advised that the loan would be “granted” as long as the money was spent on payroll (60% requirement), mortgage interest, utilities, and rent during the eight or 24 week period following the disbursement. While the rules for using the PPP loan funds were quite simple, the tax effects remained murky. For months, the IRS has been of the opinion that the costs paid with PPP loans made are non-deductible on the company’s tax return. The nation waited with bated breath for Congressional relief on COVID-19. A last minute relief came, including a provision that expenses paid using PPP are deductible. Congress also reiterated that PPP loans issued will not be included in the company’s revenue.
Here are six things you should know about PPP lending and your taxes:
• You can deduct the expenses paid with the loan proceeds. Payroll, mortgage interest, rent and utilities are all forgivable uses of the loan, and Congress has superseded the IRS guidance in Notice 2020-32 that such expenses are prohibited. Not only are these expenses deductible, but Congress has expanded the categories of expenses that can be paid for with PPP funds to include software, cloud services, accounting, human resources, riot property damage, personal protective equipment, and supplier costs the credit approval ordered or contracted.
• You do not have to include PPP funds awarded in income. While loan proceeds issued by the lender can generally be included in income, PPP loan approval is an exception to the general rule. Businesses don’t need to include debt relief in their income.
• You can use the First Coronavirus Response Act (FFCRA) for families. According to the FFCRA, some employers are required to give their employees paid vacation for reasons related to COVID-19. However, companies can still take advantage of the FFCRA tax credits in addition to using the PPP loan.
• You can postpone wage taxes According to the CARES Act, employers can postpone wage tax from March 27th to December 31st, 2020. Fifty percent of the accrued deferred taxes in 2020 must be paid by December 31, 2021, and the remainder must be paid by December 31, 2022.
• You cannot use PPP money to pay corporate taxes. As mentioned above, the PPP loan is only allowed to be used for certain identified expense categories. You cannot use the loan proceeds to pay any income, sales, or any other tax liability.
• You can file an amended tax return. If you have applied for forgiveness but have not received a decision from the IRS at the time you file the tax return and later learn that you will not receive full or partial forgiveness, you can make the appropriate adjustments by clicking Filing an amended return.
Taxes are daunting even without COVID-19 and PPP loans. Add conflicting guidelines from multiple government agencies and it’s understandable that a small business owner might feel overwhelmed. Fortunately, Congress has made favorable regulations for PPP funds, reassuring small businesses that are waiting for answers before the end of the year. If you need more information, the Cavanagh Law Firm’s tax attorneys are always available to answer any questions you may have.
Giselle Alexander is an Arizona Certified Tax Law Specialist, a CPA, and holds a Masters in Law in Taxation. Giselle represents clients in all states of the tax dispute litigation and is one of the few tax attorneys in the United States with experience in reviewing 831 (b) micro-captive insurance claims in the US tax court.