6 Issues You Ought to Know About PPP Loans And Your Taxes

The last year has been monumental to say the least. Life as we once knew it was a thing of the past for individuals and companies. With countless companies struggling to adapt to the unforeseen challenges of the pandemic, the Paycheck Protection Program (PPP), which is part of the CARES Act, has been a lifeline for many.

Giselle Alexander is an Arizona Certified Tax Law Specialist, CPA, with a Masters degree in Tax Law.

The PPP loan program was intended to help small businesses, although many large companies have benefited as well. According to the Small Business Administration, over five million PPP loans have been approved, the majority of which went to small businesses. Ninety-two percent of the loans granted were $ 250,000 or less and 87% were less than $ 150,000. The average loan size was $ 100,729.

Many companies needed the money to keep their employees running and to pay for the daily expenses to keep the business open. Business owners were advised that the loan would also be “granted” as long as the money was spent on payroll (60% requirement), mortgage interest, utilities and rent during the eight or 24 week period following the payment. While the rules for using the PPP loan funds were quite simple, the tax effects remained murky. For months, the IRS has been of the opinion that the costs paid on PPP loans issued are non-deductible on the company’s tax return. The nation waited with bated breath for Congressional relief on COVID-19. A last minute relief came, including a provision that expenses paid using PPP are deductible. Congress also reiterated that PPP loans issued cannot be included in the company’s revenue.

Here are six things you should know about PPP lending and your taxes:

You can deduct the expenses paid with the loan proceeds: Payroll, mortgage interest, rent and utilities are all forgivable uses of the loan, and Congress has superseded the IRS guidance in Notice 2020-32 that such expenses are prohibited. Not only are these expenses deductible, but Congress has expanded the categories of expenses that can be paid for with PPP funds to include software, cloud services, accounting, human resources, civil unrest damage, personal protective equipment, and supplier costs of the credit approval ordered or contracted.

You don’t need to include PPP funds awarded in income: While loan proceeds granted by the lender are generally included in income, PPP loan origination is an exception to the general rule. Businesses don’t need to include debt relief in their income.

You can use the First Coronavirus Response Act (FFCRA) for families: The FFCRA requires some employers to give their employees paid vacation for reasons related to COVID-19. However, companies can still take advantage of the FFCRA tax credits in addition to using the PPP loan.

You can defer income tax: According to the CARES Act, employers can defer income tax from March 27 to December 31, 2020. Fifty percent of the accrued deferred taxes in 2020 are due by December 31, 2021 and the remainder by December 31, 2022.

You can’t use PPP money to pay corporate taxes: As mentioned above, the PPP loan is only allowed to be used for certain identified expense categories. You cannot use the loan proceeds to pay any income, sales, or any other tax liability.

You can submit an amended tax return: If you asked for forgiveness but didn’t receive a decision from the IRS at the time you filed your tax return and later learned that you will not receive full or partial forgiveness, you can make the appropriate adjustments by filing an amended return.

Taxes are daunting even without COVID-19 and PPP loans. Add conflicting guidelines from multiple government agencies and it’s understandable that a small business owner might feel overwhelmed. Fortunately, Congress passed favorable regulations on PPP funds and reassured small businesses that were waiting for answers before the end of the year. If you need more information, the Cavanagh Law Firm’s tax attorneys are always available to answer your questions.

Giselle Alexander is an Arizona Certified Tax Law Specialist, CPA, with a Masters degree in Tax Law. Giselle represents clients in all states of the tax litigation and is one of the few tax attorneys in the United States to have experience reviewing 831 (b) micro-captive insurance claims in US tax court.