Millions of businesses have received Paycheck Protection Program (PPP) loans and COVID-19 Economic Injury Disaster Loans (EIDL) grants. As tax time nears, many of these businesses are wondering what receiving a PPP loan or EIDL grant means for their taxes.
The original CARES act left many unanswered questions as to what deductions would be allowed if items were paid for with loan or grant funds. Would the loan be taxed if it is forgiven? How do you ensure the loan is forgiven? Thankfully, Congress has addressed these questions and most decisions benefit businesses.
Tax on Loans
Neither PPP loans nor EIDL grants will be taxed even if they are forgiven.
Business expenses that are normally deductible will be deductible even if you used either your PPP or EIDL funds to cover the expense.
To qualify for PPP loan forgiveness you must meet the following criteria as outlined by the SBA:
- Employee and compensation levels were maintained
- The loan proceeds were spent on payroll costs and other eligible expenses; and
- At least 60 percent of the proceeds were spent on eligible payroll costs
Those that received EIDL grants were already pre-approved for forgiveness.
You can apply for forgiveness any time after the funds have been completely used or up to 10 months after the last day of the covered period. You must contact your lender for the appropriate form(s). Be sure you have kept clear and complete records.
Once the loan is forgiven it will also increase your basis if you own a flow-through entity such as a partnership (tax form 1065) or subchapter “S” corporation (1120S).
More Good News
The second round of PPP loans and businesses can qualify even if they have already received past loans. The only additional requirement is to have gross revenue decline by 25% or more for at least one quarter when comparing 2020 to 2019. EIDL loans are now available again too.
There is expanded use available for the Employee Retention Credit (ERC). The rules differ if using a quarter from 2020 or 2021 and you cannot use the same wages for PPP forgiveness and claiming the ERC so be sure to carefully determine what wages are eligible.
There are expanded rules on allowing Net Operating Losses (NOLs) to be carried back for 5 years instead of 2 for 2018 – 2020. If you used NOLS on your 2019 return, it may be worthwhile to review if amending and carrying those losses backwards is more beneficial. Furthermore, it may be a good idea to take advantage of opportunities like Cost Segregation Studies (for real estate owners) or section 179D energy efficiency deductions to possibly create NOLs. Be sure to review your basis carefully with your tax professional to ensure you can carryback those losses and use them.
Now the Bad News
According to the IRS, it plans on increasing small business audits by 50% in 2021. Due to the complexities of the stimulus bills and new scrutiny by the IRS, it is more important than ever to ensure you have all your paperwork in order and you file correctly. Hiring a professional CPA can alleviate stress and make certain your taxes are in order.