Examining the Tax Implications of PPP Loans
Even if the loan is forgiven, expenses paid with a PPP loan might be deducted on your taxes.
Officially, the Paycheck Protection Program will cease on May 31, 2021. For additional information, see our PPP Loan Forgiveness Guide.
For business owners who obtained a loan under the Paycheck Protection Program, the approaching tax season has raised new questions. Answers to these queries have been difficult to come by, in part because of the IRS’s fluctuating advice. However, new guidelines stated out in the most recent round of coronavirus treatment assist to clear things up.
Doing your taxes was difficult for most before COVID. The good news is that this year’s tax returns won’t be any more difficult than previous years.
PPP loans that have been forgiven are not taxable.
If you have a business loan and it is forgiven, that is automatically taxable income in the past and in the future. It’s always been in the internal revenue code up to this point. Loans through the Paycheck Protection Program are an exception to this rule. Forgiven PPP loans will not be counted as income, according to Congress and the IRS. This is true whether your full loan or a portion of it is forgiven.
If it is forgiven, it will not be taxable income.Â
You can deduct expenses incurred as a result of a PPP loan.
It’s been a bit of a moving target with this one. The IRS formerly said that expenses paid with PPP loan funds could not be deducted if the loan was or would be forgiven.
That changed on Dec. 27, 2020, when the coronavirus relief legislation was enacted into law, stating that deductions should not be prohibited just because the debt was forgiven.
This means that any expenses incurred as a result of your PPP loan are tax deductible. This result effectively generates two tiers of tax benefits for PPP loan recipients. The first benefit is making the loan income-tax-free. The second is allowing businesses to claim income deductions on expenses paid
PPP funding cannot be used to pay for business taxes
The most recent round of coronavirus relief also allows business owners greater options when it comes to how they use PPP funds. Protective equipment, property damage, and business software are among the new costs covered.
Taxes on businesses are not included in the expanded list. As a result, if you use your PPP loan to pay your business taxes, you will not be forgiven that amount.
The Employee Retention Tax Credit is still available.
If your business meets the requirements, you can now claim the Employee Retention Tax Credit. There is one crucial caveat: salaries paid with a forgiven PPP loan cannot be claimed.
You can, however, claim the credit on salaries paid in excess of the forgiven amount.
To be eligible for the tax credit, you must continue to pay employees despite being temporarily closed due to COVID-19 limits or experiencing a 20% decline in gross receipts from the previous year’s comparable quarter.
The coronavirus relief bill ushered in these changes on Dec. 27, 2020, but they are retroactive to March 12, 2020. The credit is valid for eligible wages paid up to July 1, 2021.
Apply today with G-Force Funding for business loans from $10,000 – $500,000.
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