In this 6-minute read:
- Is the PPP loan taxable?
- What are the tax implications of a forgiven PPP loan?
- Will my state tax forgiven PPP funds?
- Do you have to report the PPP loan on your taxes?
- Do employees have to pay taxes on PPP money? What about payroll taxes?
- Are PPP-covered expenses tax deductible?
- Can you still get the employee retention credit if you received the PPP loan?
The PPP loan is a business loan designed to help small businesses through the financial challenges of the global coronavirus pandemic. The beauty of this loan is that it can also be completely forgiven when spent on certain authorized expenses that have been approved by the SBA.
But, are there any tax implications for borrowers that get the PPP loan?
If you’ve received the PPP loan, your taxes are going to look a little different this year. With this new program, many business owners and their accountants have questions about how the PPP loan will affect their business taxes. We hope we can help clear the waters for you a little.
Important note: We are not tax professionals and nothing in this article should be construed as tax advice. As you are preparing your business taxes, please consult a tax professional to ensure your business income is reported accurately. Also, the tax laws relating to the PPP have been updated several times and everything is constantly in flux. We have made an attempt to provide accurate information but assume no liability for your actions. It is solely your responsibility to report your business taxes accurately.
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Is the PPP loan taxable?
The PPP loan is not considered taxable income (at least not on a federal level). If you receive funds from this program, you don’t have to worry about paying federal taxes on it. This program is intended to provide relief to your business, and removing the tax obligations from this income allows you to use more of the funds to keep your business moving forward.
However, while you don’t have to pay federal taxes on the PPP loan, your taxes may be affected in other ways.
What are the tax implications of a forgiven PPP loan? Will my state tax forgiven PPP funds?
Historically, forgiven loans automatically become taxable income. But the PPP loan is different. While forgiven PPP loans do still become money that you don’t have to pay back, you do not have to pay federal taxes on them.
It is important to know, however, that some states may tax forgiven PPP loan proceeds. So, as you file your business taxes, make sure to check if there are any tax implications on your state’s level. Your tax consultant should be able to help you find this information. Read more about the possible state tax implications of forgiven PPP loans.
Read this article for more details about PPP loan forgiveness tax implications including state-by-state info.
Do you have to report the PPP loan on your tax return?
Generally, when a loan is forgiven, you are still required to report that to the IRS on your tax return because it becomes taxable income at that point. The PPP loan is not taxable income though.
According to an announcement from the IRS in December 2020, you should not report your forgiven PPP loan on your federal taxes.
“When all or a portion of the stated principal amount of a covered loan is forgiven because the eligible recipient satisfies the forgiveness requirements under section 1106 of the CARES Act, an applicable entity is not required to, for federal income tax purposes only, and should not, file a Form 1099-C information return with the IRS or provide a payee statement to the eligible recipient under section 6050P of the Code as a result of the qualifying forgiveness. The filing of such information returns with the IRS could result in the issuance of underreporter notices (IRS Letter CP2000) to eligible recipients, and the furnishing of such payee statements to eligible recipients could cause confusion. This announcement is intended to prevent any such confusion.”
This is basically stating that for the PPP loan you shouldn’t file any of the general forms that you would to report a forgiven loan, because if you do it could be confused as taxable income, resulting in you having to pay taxes on that loan or receiving some kind of underreporting penalty until that confusion is resolved.
Do employees have to pay taxes on PPP money? What about payroll taxes?
This is where things can get a little hairy. If you use your PPP funds to pay your employees’ salaries (as intended and allowed by law), 7our employees do still need to pay their income taxes, and as with most companies, this tax is withheld from their take-home pay. They are not receiving the PPP loan. For all intents and purposes, they are receiving their regular paycheck.
But, as part of your payroll expenses under the PPP loan, you can pay their employment taxes with your PPP funds.
To help illustrate this, let’s say your employee should get a paycheck for $2,000. If you withhold $300 for their taxes, then they will receive $1,700. Your PPP loans cover the total $2,000.
While you can cover your employees’ portion of taxes with your PPP funds, you may not be able to use your PPP loans to pay your portion of the payroll taxes. Because you do still have to report your gross payroll for all employees, you may still need to pay taxes based on that amount, regardless of whether their income was covered by the PPP loan or not. Again, we are not tax professionals, and you should consult with a qualified tax advisor if this situation applies to you. Read more about the nuances here, and please consult your professional tax advisor to confirm if this is the case for your business.
Are PPP-covered expenses tax deductible?
Initially, the IRS was against deducting business expenses that were paid for by the PPP loan. However, as of December 27, 2020, the President signed the Consolidated Appropriations Act into law, allowing the expenses covered by your PPP loan to be tax deductible. This means that any business expenses that you would normally deduct from your business taxes, even if they were paid for by the PPP loan, may still be deducted when you file your tax returns.
Can you still get the employee retention credit if you received the PPP loan?
Another big question that has come up is whether those who used the PPP loan to help retain their employees are eligible for the Employee Retention Credit.
According to the IRS:
“the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
“For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19.”
Whether you used the help of the PPP loan or not, as long as you meet the eligibility requirements for this credit, you can receive it. It is important to note that any payroll costs that count as qualified wages under this credit are not eligible for full loan forgiveness if you elect to claim the credit on those amounts.
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