If your business received funding through the Paycheck Protection Program to help cover expenses during the COVID-19 pandemic, you may be wondering how it will impact your 2020 tax returns. Whether you are just starting the loan forgiveness process or applying for the latest round of PPP funding, here are the implications you should be aware of.
The Coronavirus Aid, Relief and Economic Security Act (CARES) passed in March 2020 provided assistance to individuals and businesses in the United States impacted by pandemic-related closures. Nearly $500 billion in PPP loans went to qualifying small businesses in 2020 to cover operating and payroll costs needed to stay afloat during shutdowns. These are forgivable loans which means that if your business meets certain requirements, some, or all, of your borrowed amount will not be owed back. PPP loans are issued by participating lenders, such as BankFive, and are backed by the Small Business Administration.
PPP loans offer low interest rates of 1%, however businesses that receive full forgiveness do not have to pay back the loans. In most cases, the loans are eligible for forgiveness as long as the funds were used for approved expenses. These approved items include expenses incurred during a specific period and within approved categories. 60% of funding received was required to be spent on employee payroll costs, ensuring you were not laying off workers, while the other 40% could go towards other expenses that qualify for forgiveness.
Effect on 2020 Tax Returns
In December 2020, the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) was passed which made it clear PPP loans were completely tax-exempt and should not be reported as gross income. The CRRSAA also reversed the original provision that expenses covered by a PPP loan could not be written off. Therefore, items such as payroll, rent and utilities can still be reported as expenses on 2020 tax returns.
For example, if your business received $50,000 from the PPP, this should not be reported as income. If you used a portion of that $50,000 to cover payroll expenses, you can still report that as an expense, even though it was covered by PPP funding. The original provision in early 2020 that stated expenses covered by PPP funding could not be written off was reversed due to the fact it would cause businesses to have a higher taxable revenue. This also applies to the second round of PPP funding.
Here we address some additional common points of confusion surrounding PPP loans and tax implications:
• The PPP Flexibility Act, passed in June 2020, allowed businesses to defer payroll taxes through the end of 2020, even if they received a forgivable PPP loan. If deferring these taxes, the employer must pay 50% of the deferred amount by December 31, 2021, and pay the remaining deferred balance by December 31, 2022.
• PPP funds cannot be used to pay business taxes.
• If you received an Economic Injury Disaster Loan (EIDL) in addition to a PPP loan, the EIDL loan will not impact your PPP loan forgiveness. However, if you received an EIDL grant, the grant amount will be subtracted from the amount of your PPP loan that is forgiven.
• You can still qualify for the Employee Retention Tax Credit if you received a PPP loan. This has been expanded to 70% on $10,000 in qualified wages per quarter.
To start the forgiveness process on an existing BankFive PPP loan, or for more information about the latest round of PPP funding, visit our dedicated Paycheck Protection Program page.