PPP Tax Implications | Will I Be Taxed for Government Aid During COVID-19?Pat Fontana
Running a business has been challenging over the past year. The pandemic has created issues for business owners trying to maintain revenue while continuing to serve clients and keep their staff employed. Dealing with changes and tax implications can be equally challenging, now that tax season is here. While many have received assistance for maintaining business operations, the question arises as to whether businesses will be taxed for government aid during COVID-19.
Paycheck Protection Program (PPP)
Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, authorizing $2.2 trillion to help individuals and businesses survive financially during the trying times of the COVID-19 pandemic. The Paycheck Protection Program (PPP) was authorized as part of the CARES Act, to help keep small businesses afloat.
When PPP loan proceeds are used for qualifying costs, including rent, mortgage interest payments, utility payments, and health insurance, with 60% of the funds used for payroll, then the loan will be forgiven. The US Small Business Administration (SBA) states that it has approved 8,246,234 PPP loans through March 2021 through 5,475 lenders, for a total loan amount of $718,096,883,479. In 2020, the amount of PPP loans and forgiveness totaled:
- Total 2020 PPP volume: $521.2 billion
- Forgiven loan amount: $186.1 billion
- Amount not forgiven as of March 2021: $0.6 billion
- Under review: $86.2 billion
- Applications not yet received: $248.3 billion
While a forgiven loan typically becomes taxable income, Congress stated in the CARES Act that forgiven PPP loans are not to be included in taxable income on the federal level.
In addition to the CARES Act verbiage, Congress specified in December 2020 that a forgiven PPP loan is completely tax-exempt on the federal level and is not taxable income. While many states will typically conform to federal regulations, a number of states currently tax forgiven PPP loans, including Arizona, Arkansas, Hawaii, Maine, Minnesota, New Hampshire and Virginia. Bills have been introduced to conform these states to federal tax treatment of forgiven PPP loan and Wisconsin just recently passed such a bill.
Other Tax Considerations
Recent changes have been enacted by Congress that will help small businesses who received PPP loans, when calculating tax deductions. The Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) passed in December 2020 overrode some IRS regulations in regard to expenses paid for with the PPP funds.
The IRS and the Treasury Department initially stated that business expenses such as payroll, rent, and utilities that were paid with PPP loan funds could not be written off. The recent legislation has reversed that, as a result of some businesses having higher taxable revenue in 2020 because they were not able to write off as many expenses. However, since PPP loans are designated for the specific purposes of paying these expenses, including rent, mortgage interest, utilities, and payroll, the funds cannot be used to pay business taxes.
Another change made in December 2020 is that businesses can now receive a PPP loan and still obtain the Employee Retention Tax Credit (ERTC) for 2020 and for 2021. If a business received the funds from a PPP loan in 2020, that business can now apply the ERTC for their 2020 taxes, if the PPP and ERTC do not cover the same payroll expenses.
The ERTC has also been expanded significantly to help businesses during the first half of 2021. While the prior credit allowed for a maximum benefit of only $5,000 for each employee during all of 2020, the new credit allows for a maximum benefit of $14,000 for each employee through June 30, 2021. More businesses are also included in the expanded eligibility guidelines, including many that had significant revenue reductions in 2020.
CONTACT CLEAR VIEW BUSINESS SOLUTIONS FOR TAX HELP
Tax regulations seem to be changing daily. Government assistance can be a tremendous benefit to your small business, but you need to understand all the requirements and tax implications that come with each opportunity.
At Clear View Business Solutions, we know that taxes can be confusing. We can help ensure that you are maximizing your available credits and deductions and minimizing your tax payment. We work with you at tax time and throughout the year to help you be better prepared to make sound financial decisions and to plan for your success. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.