As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
When the coronavirus pandemic first hit the United States in March 2020, in response, Congress quickly passed a relief package to support individuals and businesses struggling in the wake of the economic downturn. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 as Congress’s first coronavirus response. One of the signature programs in the package was the Paycheck Protection Program (PPP), run by the Small Business Administration (SBA), which provides low-interest forgivable loans for small businesses to use on payroll and other business costs.
Given when the PPP first started providing loans to businesses across the nation, we are now encountering the first tax season in which PPP loans and forgiveness will have to be accounted for. Many borrowers are still struggling with their finances as we look toward the end of the pandemic, so we wanted to take the time to explain how PPP loans could affect tax filings for small business owners.
The Paycheck Protection Program
The Paycheck Protection Program established a $953 billion program that has lasted nearly a year and been modified and expanded upon through three additional legislative relief packages. The program allows small business owners, self-employed individuals, sole proprietors, and independent contractors to borrow PPP funds from the SBA in the form of low-interest forgivable loans.
First draw and second draw loans from the Paycheck Protection Program have the same terms and conditions:
- The guarantee percentage is 100 percent.
- No collateral will be required.
- No personal guarantees will be required.
- The interest rate is 1%.
- The maturity is five years.
All loans are processed by lenders under delegated authority and lenders are permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds.
Once businesses have received their loan, they can spend them on:
- payroll expenses,
- interest payments,
- business expenses,
- health care,
- property damage,
- sick leave,
- and other eligible expenses.
The PPP helps small business owners keep employees on the payroll during the COVID-19 pandemic, with a guaranteed loan forgiveness application at the end.
For small business owners during the COVID-19 pandemic, PPP loans have been able to help their businesses stay afloat without any debt obligations. This is because PPP loans, unlike most business loans, can be fully forgivable.
The SBA will forgive loans if “all employee retention criteria are met, and the funds are used for eligible expenses” – which means that the loan forgiveness amount can be the full amount of the loan.
To qualify for loan forgiveness, businesses must:
- use the loan and apply for forgiveness during their covered period.
- The covered period is either 8 or 24 weeks (this depends on when you took out your PPP loan, as some borrowers were given a choice in later rounds of PPP, whereas early borrowers were not).
- Depending on when the loan was disbursed, there may not be a covered period but instead, an expiration date to spend the loan amount on eligible expenses.
- The SBA says that full loan forgiveness is possible for first and second draw PPP loans if borrowers use the funds during the covered period on:
- Retaining employees and maintaining compensation
- Eligible expenses with at least 60 percent of the loan proceeds going to payroll costs
- Use the proper SBA forms from the lender and compile documentation.
- Documentation can include:
- copies of mortgage interest payments,
- payroll tax filings,
- bank statements,
- and invoices.
- Finally, after submitting the documentation, your lender will process and be in touch about the next steps.
This is a fairly straightforward process but gathering the documentation and figuring out the forms can be tricky. A lot of it has been streamlined in recent legislation, but it can still be confusing for many borrowers trying to get back on their feet. One way to make it easier is to use Biz2Credit’s PPP loan forgiveness tool. (See below for more.)
Paycheck Protection Program loans were designed to be forgiven. It is an integral part of the program meant to help small businesses.
Biz2Credit Loan Forgiveness Tool
Last July, Biz2Credit partnered with AICPA to launch a PPP loan forgiveness tool. The platform works for borrowers regardless of the lender or bank they worked with to receive the funding. The goal is to allow small businesses to complete a PPP loan forgiveness application faster, for free, and with less paperwork. All-in-all, this is designed to help small businesses get the loan forgiveness they need in a timely and efficient manner.
The website integrates a list of lenders from the SBA and CPAs can sign up to work on forgiveness applications for businesses. It is updated with SBA and Treasury information and is a free resource for small businesses who have spent their PPP loan proceeds.
PPP Implications This Tax Season – Forgiven PPP Loans are Not Taxable
The first thing to know, and the reason why applying for loan forgiveness is important for tax purposes, is that forgiven PPP loans are not taxable. Typically, forgiven business loans become taxable income, but Congress and the IRS broke with that for forgiven PPP loans.
Keith Hall, president and CEO of the National Association for the Self-Employed, notes: “If [your PPP loan] is forgiven, it will not be taxable income. Period.” Income tax will be derived from taxable income, not from the overall gross income that includes COVID-19 PPP loans.
The Employee Retention Credit and Other Tax Credits
The IRS notes that the Employee Retention Tax Credit (ERTC) is “a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020” and before June 30, 2021.
As of December 2020, businesses are allowed to take out a PPP loan to use the ERTC for both 2020 and 2021. Here are some of the new guidelines to know about the ERTC:
- If you took out a PPP loan in 2020, you can apply the ERTC for 2020 taxes as long as the PPP loan and the ERTC “don’t cover the same payroll expenses.”
- The ERTC was also expanded to help businesses in 2020 (through June 30). It now provides a maximum benefit of $14,000 per employee.
- Since the ERTC is a refundable tax credit, it is regarded as a tax payment.
Also, on the topic of tax credits, PPP loans will not interfere with your business receiving family and sick leave tax credits. Those tax credits are outlined in the Families First Coronavirus Response Act (FFCRA).
- However, you cannot use the PPP loan to pay for sick and family leave wages if you also want to receive the tax credit for that leave.
Deferred Payroll Tax
If you decided to defer payroll taxes through December 31, 2020, that is still allowed. In fact, the PPP Flexibility Act from June 2020 allows you to defer those taxes even after a PPP loan is forgiven.
However, 50 percent of the deferred taxes from 2020 must be paid by December 31, 2021, and the other 50 percent must be paid by December 31, 2022.
What about tax business write-offs and deductions?
The passage of the Consolidated Appropriations Act changed some of the earlier guidelines here. The IRS and Treasury Department originally said that payroll, rent, and utilities could not be written off as business expenses if they were paid for with a PPP loan. However, Congress reversed that.
Now, if you received a PPP loan, you can still write off business expenses paid for with PPP funds. These are regular tax deductions that businesses would normally take.
Is this just for small businesses? What sole proprietors, entrepreneurs, self-employed individuals?
Any PPP loan that was forgiven is not taxable. This is not just for small businesses but for all entities that received a PPP loan – as long as their eligibility aligns with SBA guidelines. This includes:
- certain non-profit organizations and 501(c)(6)s,
- small news organizations,
- housing cooperatives,
- veterans’ organizations,
- tribal businesses,
- self-employed individuals,
- sole proprietors,
- independent contractors,
- and small agricultural co-operatives.
As Keith Hall, president and CEO of the National Association for the Self-Employed, says: “The good news is this year isn’t going to be any harder than tax returns you’ve had in the past.”
Publicly traded companies and recipients of a Shuttered Venue Operator grant from the SBA are not allowed to apply for PPP funding and therefore this does not apply to them.
What about Economic Injury Disaster Loans (EIDL)? Are they forgivable?
COVID-19 Economic Injury Disaster Loans were provided by the SBA to “small businesses and nonprofit organizations that are currently experiencing a temporary loss of revenue.” There are two types of EIDL programs due to the pandemic:
- EIDL loans are basic, non-forgivable loans with fixed terms for repayment.
- Targeted EIDL Advance grants are for businesses in low-income communities that need the funds to stay afloat. The SBA reached out to small businesses and the loans are forgivable.
Only the Targeted EIDL Advance grants are eligible for loan forgiveness and, therefore, those grants are tax-free. They do not need to be included in taxable income when filing a tax return.
Are there any exceptions?
One thing that is not allowed is using the PPP funds to pay for business taxes. This is not a covered expense and will not be part of your loan forgiveness. So, if any part of the loan is used for business taxes, it is not forgivable and therefore taxable.
Eligibility, covered period, and eligible expenses are thoroughly documented by the SBA and Congressional legislation. Exceptions, in this instance, are from the IRS.
As noted above, you cannot claim the Employee Retention Tax Credit (ERTC) for wages paid with a forgiven PPP loan.
Also, if you or any employee received unemployment insurance, those benefits are considered taxable income. The benefits will have to be reported as income using the 1099-G slip from the state labor office.
States are the same, right?
Most states are following the same guidelines from Congress’s December legislation and not taxing forgiven PPP loans. However, these fourteen states either do not exclude the PPP loan from taxable income or do not allow expense deductions paid by the PPP loan:
- Included in Taxable Income
- Massachusetts (check specific guidelines)
- Nevada (check specific guidelines)
- New Hampshire
- Texas (check specific guidelines)
- Expense Deductions Not Allowed
- Nevada (check specific guidelines)
- North Carolina
- Ohio (check specific guidelines)
- Texas (check specific guidelines)
- Washington (check specific guidelines)
Paycheck Protection Program loans hopefully should not have a dramatic impact on small business tax filing because the forgiven loans are not considered taxable income and are therefore not taxable. If your small business has received a PPP loan or targeted EIDL advance grant that was then forgiven, then those loan amounts are not added to your taxable income.
The Paycheck Protection Program and other COVID-19 programs from Congress, the SBA, and the Treasury department are designed to help small businesses. The passage of the Consolidated Appropriations Act of 2021 helped codify these new procedures for the 2020 tax season. For more information on taxes and the emergency loans enacted during the COVID-19 pandemic, visit the U.S. Chamber of Commerce.
If you received a PPP loan, be sure to check out Biz2Credit’s PPP Loan Forgiveness Tool as a quick, easy, and free way to apply for PPP loan forgiveness. Biz2Credit is here to help with all of your small business loan needs and questions.