March 17, 2021
The Paycheck Protection Program, or PPP, was enacted last year by Congress and the Trump administration as a part of the Coronavirus Aid, Relief, and Economic Security or CARES Act. It was intended to cushion the blow of the COVID-19 pandemic by providing a way for small companies to continue paying their employees, thereby preventing them from laying off workers and adding to the economic burden or unemployment payments on the states. PPP loans were designed to be forgiven by the federal government, as long as the company met a number of criteria and filled out an application. As a result, it created quite a tax conundrum, which we will cover here.
What Is The PPP
The PPP, also known as the Paycheck Protection Program, was a loan program aimed at small businesses. Run through the Small Business Administration, it was designed to help companies by providing them with an influx of potentially forgivable cash when they were struggling due to the pandemic. Since many small businesses, like restaurants and bars, temporarily shut down at the beginning of the pandemic, they lost crucial revenue. With a PPP loan, they were able to still pay their workers, despite the lack of business.
A PPP loan is designed to cover expenses for 24 weeks, also known as the initial length of the pandemic shutdown. The loan has an interest rate of 1%, making it an affordable option for many companies, especially those that were struggling at the time. Businesses had either two years to pay off the loan, starting at the end of the initial 24-week period after receiving it, or five years to pay it entirely, if they received the loan after June 1, 2020. However, the loan is also entirely forgivable, meaning that there are no payments due and the entire loan is cleared up. At that point, it’s treated more like a grant instead of a loan.
Companies that were eligible for loan include sole proprietorships, independent contractors, and those who are self-employed, as well as loosely defined small businesses. In order to receive a loan, companies and qualifying individuals had to go through a bank and fill out an application with the Small Business Association, which administered the loan program.
According to the terms of the loan, at least 60% of the funds had to be used for payroll and related expenses, like employee benefits. The remaining portion could be used on things needed to keep the business running, like mortgage or rent payments, utilities, supplies needed to help the company meet COVID-19 safety guidelines, and even items needed to help the business operate, like accounting software.
Although plenty of controversies appeared in the news regarding the program, it wasn’t all bad. There was plenty of good involved as well. The program was wholly successful, and a number of companies have applied for and received loan forgiveness.
How to Obtain PPP Loan Forgiveness
Since the PPP loan program was designed to have the loans forgiven, as long as the required records could be produced and the business used the funds for the proper reasons, like those explained above, a process was created to ensure that this was done on a timely basis. Companies and individuals who took out the loans had to apply with their lender in order to have the loan forgiven, filling out the official form and producing accounting records to show where and how the funds were used.
The forgiveness application must be filled out and turned in after the 24-week loan period is over, and the bank has up to 60 days to make the decision. Although this was designed to turn the loan into a grant, thereby helping already struggling businesses by preventing them from having to repay the loan at a later date, it did create some issues for those companies and individuals (in the case of sole proprietors, independent contractors, and self-employed workers). Initially, the PPP was designed to be tax-free, meaning that companies didn’t need to declare it as taxable income on their returns. With that said, there is a bit more to this that needs to be covered, as it can be quite confusing.
The Impact of PPP Loan Forgiveness on Your Federal Taxes
Although the PPP loan itself, regardless of its amount, is tax-free and does not count as income on a tax return, meaning that you do not need to declare it as such, the items that you bought using the loan, such as computer programs, cleaning supplies, and face masks, are not deductible. This was declared in a ruling by the IRS that was published in April of 2020.
Where things become a bit more confusing is when the loan hasn’t yet been forgiven. There are plenty of questions regarding this, and no clear answers as of yet. Technically, those expenses should be deductible, as the loan is still in place and is being paid back by the company that took it out. However, there are some loopholes here that make this is a tricky line to walk. In order to see if your business qualifies for these deductions or is unable to deduct those expenses due to having the loan forgiven, contact a tax professional, as this is something that you do not want to attempt to deal with on your own. If your tax return is incorrect, you could end up being penalized, audited, fined, or more.
Effects of PPP Loans on Your State Taxes
In addition to leaving the deduction question without a truly clear answer on the federal level, it is confusing on the state level as well. The PPP loan is tax free from a federal perspective, but your state may see it in a different manner. On top of that, laws vary regarding whether or not the expenses that fall under a forgiven PPP loan can be deducted or not on a state tax return. For example, some states, such as California, do not allow these deductions if the loan was forgiven. Other states see things differently. Then, there are the states that allow companies to exclude a forgiven PPP loan in their declared income. It all depends on the tax laws in your particular state, and things can vary considerable from one state to the next.
With so many questions and so few clear answers surrounding the PPP loans, whether or not they are forgiven, as well as their tax free or deductible-eligible status, it’s understandable that companies that need clarification seek out the professional help of a tax preparation company. It’s important to seek the guidance a tax expert in order to ensure that everything is done correctly.
If you have received a PPP loan and are wondering how to proceed with either loan forgiveness or how to account for it on your tax return, then reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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