How Do PPP Loans Impact Business Taxes?

Can businesses claim tax deductions for business expenses under the Payment Protection Program (PPP)? Is a PPP loan considered taxable income? Here are your tax questions, answered.

Key takeaways

  • Business expenses associated with PPP loan forgiveness are deductible
  • Forgiven PPP loans are not considered taxable income
  • Payroll taxes can be deferred, even after PPP loans are forgiven
  • Employers can take advantage of the Employee Retention Tax Credit and PPP loans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was introduced in March 2020 to assist American businesses and individuals struggling financially. 

Part of the CARES Act was the creation of the Paycheck Protection Program (PPP), which provided businesses with loans that would be forgiven if they complied with all requirements, including using the loans for qualified business expenses. PPP loans are just one form of relief for businesses impacted by the pandemic, which has caused record closures, layoffs, and unemployment claims over the last year.

Since March 2020, there have been many questions circulating about PPP loans and what they mean for business expense deductions and taxes in general. As a new relief bill was passed at the end of 2020—the Consolidated Appropriations Act of 2021—some of these questions were answered, and common issues were clarified. 

Let’s walk through what you need to know about business expenses and whether they’re deductible, whether a forgiven PPP loan is considered taxable income, payroll taxes and PPP, and other important information about the program.

Business expense deductions

The CARES Act did not directly address whether business expenses covered as part of the loan-forgiveness process would be deductible. But in April 2020, the IRS said that no deduction would be allowable for expenditures that were otherwise deductible if the expense payment results in PPP loan forgiveness. 

In November, the IRS also said that a taxpayer calculating taxable income could not deduct eligible expenses in 2020 if they had reason to expect reimbursement in the form of loan forgiveness based on qualified business expenses paid during the period.

However, the second relief bill passed in late December 2020 clarified that deductions are allowable for the otherwise deductible business expenses paid with a forgiven PPP loan. It also explained that the tax basis and other attributes of the borrower’s assets would not be reduced because of loan forgiveness.

Another piece of good news is that this new clarifying provision is effective dating back to when the CARES Act was first enacted. The second round of PPP loans, which the new relief bill also authorized, will be treated similarly.

Not all business expenses are included as part of PPP loan forgiveness. Note that the PPP loan funds cannot be used to pay business taxes, for example. Eligible expenses include: 

  • Payroll costs
  • Rent 
  • Mortgage interest
  • Utilities payments
  • PPE and worker protection expenses
  • Business software and other operational expenses
  • Certain property damage costs
  • Supplier expenses

As long as at least 60% of the PPP loan was used for payroll expenses and the remaining 40% was used for these other qualified expenses, the loan will be eligible for complete forgiveness. 

PPP loan as taxable income

The CARES Act excluded PPP loan forgiveness from a borrower’s gross income, meaning that businesses didn’t have to pay taxes on the funds received. Lawmakers did not want to add an additional tax burden for companies that were already struggling.

The December 2020 bill reestablished that a forgiven PPP loan is not taxable income and is completely tax-exempt. 

Payroll taxes and PPP

Another vital thing to know is that employers can defer payroll taxes even after the PPP loan is forgiven. But half of the deferred payroll taxes from 2020 must be paid by the end of 2021, and half must be paid by the end of 2022.

The PPP Flexibility Act clarified these rules in June of 2020, in addition to changing the maturity period of the loans to a minimum of five years and extending other PPP-related deadlines.

Other PPP tax implications

The second relief bill included a provision that businesses taking out a PPP loan can also obtain the Employee Retention Tax Credit (ERTC) for both 2020 and 2021 tax years. So, a company can apply the ERTC for 2020 taxes. However, note that the ERTC and PPP loan cannot cover the same payroll expenses.

The ERTC is available to businesses with under 500 employees that either had to suspend or partially suspend operations because of a COVID-19-related court order or had a 20% decline in gross receipts when compared with the same period the year before.

The tax credit was 50% of up to $10,000 in wages for 2020, but the new bill expanded the ERTC from a maximum of $5,000 per employee to $14,000 per employee beginning January 1, 2021, and through June 30, 2021. 

Receiving a PPP loan also does not get in the way of the business receiving family and sick leave tax credits under the Families First Coronavirus Response Act (FFCRA). Companies cannot use the loan funds to pay for the sick and family leave wages, however, if they expect to get the tax credit.

Work with a tax expert for additional assistance

If you still have questions about how PPP loans could impact your taxes this year, contact a tax professional who can help you make sense of the changing laws and regulations. You never want to make a mistake on your tax return or leave money on the table. The professionals at Provident CPA & Business Advisors specialize in tax minimization, and we work with a variety of individuals and business owners.

Contact Provident to meet with an expert about PPP loan implications and how best to prepare your taxes.

What the Special $300 Charitable Deduction Means for 2020 Taxes

Here’s what you need to know about charitable deductions and the special CARES Act provision that allows anyone to deduct $300 in qualifying donations

Key takeaways

  • What is the $300 charitable deduction?
  • What charitable organizations qualify?
  • How does this interface with the standard deduction?

As you’re getting ready for tax season, it’s essential to tally all the deductions and credits you’re eligible for and figure out if you want to take the standard deduction or itemize. Tax laws change, and there may be new deductions or additional steps to take, especially in the wake of government relief and other changes wrought by the COVID-19 pandemic.

One area to consider is your contributions made to charitable organizations. Fortunately, a new provision from the IRS allows many taxpayers to deduct up to $300 in qualifying charitable donations whether or not they take the standard deduction.

Do your contributions qualify? Here’s an overview of what the new $300 charitable deduction entails and a look at which donations are considered charitable contributions. We’ll then briefly go over choosing the standard deduction versus itemizing.

What is the $300 charitable deduction?

Qualifying cash donations of up to $300 made before December 31, 2020, can be deducted by taxpayers this year. The provision was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in early 2020, and aimed to encourage Americans to support charities that may be struggling through the pandemic. One study showed that 91% of charitable organizations had experienced some negative impact from COVID-19. 

Other provisions included to help charities were higher contribution limits for corporations, individuals who itemize deductions, and businesses that donate food to charities.

One significant benefit of this new deduction is that taxpayers don’t have to itemize their deductions to claim it, as is usually the case. Instead, they can claim an “above-the-line” deduction, as the IRS terms it, of a maximum of $300 for charitable donations. This lowers the taxpayer’s adjusted gross income and taxable income.

Cash donations must have been made by check, credit card, or debit card. Excluded from eligible donations are securities, household items, and other property. You also cannot deduct time or services donated to an organization.

What are qualifying charitable organizations and donations?

Most donations made to charities will qualify, but there are some exceptions to be aware of. Note that contributions made to supporting organizations or donor-advised funds do not qualify for the $300 provision.

The IRS defines qualified charitable organizations as:

  • Community chests, corporations, trusts, funds, or foundations that operate solely for charitable, religious, scientific, literary, or educational purposes, or for the prevention of animal or child cruelty.
  • War veterans’ organizations.
  • Domestic fraternal societies, orders, and associations that operate under the lodge system.
  • Nonprofit cemetery companies or corporations.
  • Government bodies, whether federal, state, or local, if donations are used for charitable causes.

To qualify as a charity, an organization cannot give any of its earnings to private shareholders or individuals. Political contributions and homeowners’ association donations, for example, are not included. But those given to nonprofit schools, hospitals, and churches are eligible. Most donations to foreign organizations are excluded.

If you’re unsure whether an organization qualifies, you use the Tax Exempt Organization Search tool on the IRS website. It helps donors ensure that an entity is an IRS-registered 501(c)(3) organization and that a contribution qualifies for the deduction.

Remember to keep a record of the transaction when you donate. Most organizations provide a receipt or send an acknowledgment letter, so you have evidence of the amount you contributed.

How does it interface with the standard deduction?

Many taxpayers take the standard deduction, which means they don’t itemize each individual deduction for the year. Both options have their pros and cons and are appropriate for particular circumstances—you should itemize if your total deductions are more than the standard deduction. Itemized deductions break down into categories like medical costs, interest paid, charitable contributions, and more. 

For 2020, the standard deduction is $12,400 for single filers and $24,800 for married-filing-jointly taxpayers. For heads of household, the standard deduction is $18,650 for 2020 taxes. Everyone is entitled to the standard deduction, and it often saves taxpayers time when submitting their tax returns. But if you have many expenses to claim, the itemized route may help you pay less in tax. 

But remember, the special $300 charitable donation deduction helps taxpayers who take the standard deduction. They can now benefit from this 2020 contribution, in addition to those who already decide to itemize.

Working with the team at Provident CPA & Business Advisors

As the COVID-19 pandemic continues into 2021, there will likely be more special provisions to keep in mind when preparing your tax return. It’s always wise to talk to a tax professional to be sure you’re claiming everything you’re eligible for. 

When you’re ready to talk taxes, we’re ready to help. Our experts assist both individuals and businesses as they plan for the future, whether that’s long-term business growth or tax minimization. And we make sure you don’t leave money on the table when completing your return each year. 

If you’re ready to get started, contact Provident today.

Provident Tax-Saving Tips-COVID-19 Edition