The Paycheck Protection Program (PPP) loans are a popular option for businesses struggling due to COVID-19, but understanding the tax obligations associated with them can be confusing and challenging, especially tax debt resulting from receiving the PPP loans.
It's important to know that a forgiven PPP loan is tax-exempt, but using the loan can also reduce how much you can write off on your business taxes. This has made some business owners reconsider accessing the PPP loan in the first place.
One of the largest ways the U.S. government has attempted to aid small businesses during the coronavirus crisis has been through PPP loans. More than $500 billion in these loans have been distributed through mid-May, making them a popular choice for small businesses hoping to recover this year. There are still $ billions left untapped in the PPP funding, but there have been problems for business owners to access the money – evolving guidelines, confusion around the workings of the program, especially over forgiveness, could be a reason why entrepreneurs are leery of applying for aid. Further, finding a willing lender has been difficult for some, for a variety of reasons.
While the PPP program has been helpful for many businesses, the tax implications associated with them have been somewhat confusing. As the CARES Act and related coronavirus-related legislation were passed quickly through Congress and signed into law, the Small Business Administration (SBA) has tried to keep up by providing guidance. However, this guidance has been modified multiple times in the past few months and it can be challenging to keep up with the changes, particularly tax debt associated with the PPP loans.
Here are some commonly asked questions about loan forgiveness and tax obligations related to PPP for small business owners.
How does the PPP loan program work?
The PPP emergency loan program, part of the CARES Act, is authorized to distribute more than $600 billion in forgivable loans for small businesses. The program originally had $350 billion allocated in March, and another $320 billion was authorized by Congress in April after the initial funding was exhausted. These loans are issued by private lenders and backed by the SBA. The basic purpose of the PPP is to keep workers on the payroll and/or rehire laid-off workers that lost wages due to coronavirus shutdowns and disruptions.
The House and Senate voted to extend the program until Aug. 8, 2020, and the President has signed it into law. If you have been debating whether to take a PPP loan for your business, this gives you more time to collect documents, consider your options, and apply if you believe it makes sense for your business. Approximately $130 billion in funds are still available to lend to small businesses.
How can I get my PPP loan forgiven?
A PPP loan can be forgiven if at least 75% has been spent on employee payroll. The other 25% can be used for mortgage, rent, and utility payments. Forgiveness is based on employers continuing to pay employees at normal levels during the eight weeks following the origination of the loan. The Treasury Department recently released the PPP Loan Forgiveness Application, which will need to be filled out by all businesses seeking forgiveness and then submitted to the private lender they got the loan from. All businesses that have accepted a PPP loan or are considering a PPP loan should closely look over the application early in the process to make sure they are compliant.
Does a forgiven PPP loan become taxable income?
A forgiven PPP loan is tax-exempt. However, using the loan can also reduce how much you can write off on your business taxes, so keep that in mind when applying for the loan.
Can I write off payroll, rent, and utilities as business expenses if I used a PPP loan to pay for them?
No, the Treasury Department has said it would not allow for “double-dipping.” A forgiven PPP loan is effectively an untaxed grant and, as such, the IRS wants to prevent employers from receiving a “double tax benefit.” This means some businesses may have higher taxable revenue in 2020 due to not being able to write off two months of payroll and related expenses.
Can I get a PPP loan and take advantage of new Employee Retention Tax Credit (ERTC)?
No, businesses can’t take both a PPP loan and obtain the ERTC. The intention was to allow businesses to use one or the other to provide quick financial relief.
Will taking out a PPP loan interfere with my business getting family and sick leave tax credits outlined by the Families First Coronavirus Response Act (FFCRA)?
No, businesses can still take advantage of new tax credits from FFCRA while also getting a PPP loan. However, businesses are not permitted to use PPP loan funds to pay for sick and family leave wages if the business is expected to get a tax credit for that leave.
Can I defer payroll taxes while also getting a PPP loan?
Employers are allowed to defer payroll taxes (as specified in the CARES Act) from March 27, 2020, through December 31, 2020. Once a PPP loan has been forgiven, they are no longer allowed to defer payroll taxes. However, the amount of the deferred tax that accumulated through the date the PPP loan was forgiven continues to be deferred and is then due on a delayed schedule. Fifty percent of the deferred amount must be paid by December 31, 2021, and 50% of the deferred amount must be paid by December 31, 2022.
Can PPP be used to pay business taxes?
No, PPP loans can only be used to pay for specific expenses (payroll, rent, mortgage interest, or utilities), so taxes cannot be paid with PPP funds.
If you have any questions about tax debt associated with coronavirus PPP loans for your business, you can email me at Larry@TaxProblemSolver.com or phone my office at 855-BEAT IRS (855-232-5752). My Team and I are here to keep you free of any tax problems – and to take advantage of all the coronavirus tax breaks for businesses applicable to your situation. Click here for a free consultation!
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