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.
- 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
- 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.