PPP Loan Tax Implications: What Small Business Owners Need to Know
It’s possible, or maybe even probable, that the life of your small business in 2020 was sustained and supported by many of the economic incentives that came about because of the pandemic. From grants to loans, these benefits create new questions now that tax season is here. Let’s go though some of the common questions about Paycheck Protection Program Loans (PPP Loans), Economic Injury Disaster Loans (EIDL Loans), and Employee Retention Credits.
Is PPP Taxable Income?
Simply put—as long as your PPP loan amount was forgiven, it does not count as federal taxable income. Loan funds spent on the following expenses will be forgiven:
- Mortgage and utilities payments
- Operational expenses like accounting, HR, and software
- Supplier costs
- And more!
Talk with your lender about the documentation and other steps needed for PPP loan forgiveness, if you haven’t already. The PPP loan forgiveness application can be accessed on the Small Business Association website.
Note: Don’t apply for PPP loan forgiveness for your first loan if you intend to take out a second one. When you apply for forgiveness, it will make processing your second loan application slower.
How do PPP Loans Impact Federal Tax Deductions?
When the second stimulus package, the Consolidated Appropriations Act (CAA) was passed in December 2020, it made amendments and clarifications to the tax impact of PPP loans. Originally, forgiven expenses covered by the loan were not going to be counted for tax deductions or exemptions.
But that changed with the second legislation, which came with a PPP loan forgiveness update! Now, your PPP loan should not in any way impact what you can claim as a deduction on your 2020 federal business income taxes. Even if an expense was covered by a PPP loan, it is still deductible.
PPP Loan Tax Implications By State
While the federal government isn’t taxing forgiven PPP loans as income, some states are including these amounts as taxable income. Additionally, some states are not allowing the forgiven expenses to be applied as deductions. View this resource from the Tax Foundation to determine if any of this applies to your business.
Are Economic Injury Disaster Loans (EIDL) Taxable Income?
The EIDL program is a long-term loan like any other business loan. This means the balance of the loan that has to be repaid isn’t part of your business income. The exception is if you received an emergency cash advance of funds. The EIDL program included the option for a grant of $1,000 per employee, up to $10,000. This grant was available even to businesses who didn’t qualify for the full loan. However, since this is a grant, and will not need to be repaid, it does count as taxable income for both federal and state taxes. If this means your business tax liability is greatly increased, give Delta Wealth Advisors a call to talk strategy.
Employee Retention Credit & 2020 Business Taxes
The Employee Retention Credit is one opportunity to get a credit for employee wages paid in 2020 and 2021. Here are the criteria to qualify:
- Fewer than 500 employees
- Suspended or partially suspended business due to a COVID-19 government order
- At least a 20% decline in gross receipts from the same quarter in 2019
Originally businesses that received a PPP loan could not apply this credit, but that policy has been amended. This credit entitles you to claim the first 70% of eligible wages paid to each employee during the quarters you qualified, up to $7,000.
However, this credit will not show up on your yearly taxes. The IRS is structuring it to be paid out through credits on your quarterly payroll tax bill. But if you are owed more than you usually pay in taxes, you can complete IRS Form 7200 to be issued a check for the balance. The program ends on July 1, 2021.
Work with Loyal, Accurate Tax Experts at Delta Wealth Advisors
Filing business taxes for the 2020 fiscal year is a different process than any year before. This is especially true if you live in one of the states that differs from the federal PPP Loan tax policies. Bookkeeping and careful tax preparation are essential to ensure that the memories of your finances this year don’t come back to haunt you anymore with an audit or big tax bill in 2021.
Delta Wealth Advisors offers a full suite of accounting, tax, and consulting services to meet your personal or business needs. Our primary services include accounting and bookkeeping, tax planning and consultation, and audits. We also offer specialty services to meet the unique needs of each individual client. We’re always here to offer down-to-earth advice and help you make the most of your tax filing.