NBSB Explains Potential Tax Implications for PPP Borrowers
Expenses paid for with the forgiven loan amount not eligible as tax deductions
Many businesses were fortunate enough to have received funding through the SBA Paycheck Protection Program in the form of a loan, in order to keep their business afloat and workforce employed during the COVID-19 crisis. However, if you were a PPP borrower who received financing, you should be conscious of some potential tax implications you could face.
Paycheck Protection Program Overview
A part of the CARES Act, the Paycheck Protection Program (PPP) was a lifeline for qualifying businesses who were and still are struggling due to COVID-19. The PPP loan was backed by the SBA and includes the enticing feature of the loan funds being forgivable when spent in the correct way, listed below.
- Payroll-related expenses – 60%
- Other non-payroll expenses – 40%
- Interest payments (not principal) on covered mortgage obligations (mortgages in place before February 15, 2020)
- Payments for covered rent obligations (for leases that began before February 15, 2020)
- Certain utility payments
The new PPP loan came with a hefty amount of confusion on the initial loan, as well as the following forgiveness rules, which are explained clearly here on NBSB’s comprehensive PPP Loan Forgiveness webpage. Now there is the question about how the IRS will view the funds and if the government will tax businesses on the “free” money received through the program. Keep reading to find out.
Potential Tax Implications of the PPP Loan
The Good News: For the PPP loan, the CARES Act details that the loan amount a business is forgiven will not be included in taxable income, meaning business will not have pay taxes on the money that they received from the loan. The intention of the PPP loan was to avoid any tax burden on the businesses who received the funds and instead to provide them with funds to sustain their business and keep staff on their payroll.
The Not So Good News: Unfortunately, the IRS later released a notice further detailing how the loan amount that was forgiven would be treated in regards to 2020 taxes:
“This notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”
Let’s break that down into understandable terms. Basically what the IRS is stating is that if the forgiven loan is not included in the business’s taxable income on their 2020 taxes, then subsequently the expenses paid (e.g., mortgage interest, rent, utilities, etc.) with the forgiven loan amount are not able to be included as a tax deduction either. This is because expenses allocable to tax-exempt income (e.g., PPP forgiven loan) are nondeductible, because deducting the expenses would result in a double tax benefit. However, this can drastically affect a business’s final tax bill at the end of the year so it is important that this be considered.
Taxes: To be prepared for what is to come, you may want to consult your tax advisor to see how this deduction restriction may adversely affect your business’s final tax bill. It is always better to be prepared, and plan for the outcome, then to have a surprise later.
Audits: Additionally, if a business applied for PPP loan forgiveness, they should always be prepared to be audited. Although loans under $2 million may not be audited based on good faith certifications, there still is talk from government leaders about some audits of smaller PPP loans if there is suspicion of misuse of funds.
We Are Here to Help.
North Brookfield Savings Bank is proud to support our business communities in any way we can. We are proud to partner with amazing businesses and to help guide them with their financing and banking needs during this difficult time. Our NBSB Business Center Team is always read to help and has the experience and knowledge to help you reach your business goals. Contact the North Brookfield Savings Bank Business Center at 508-867-0710, at firstname.lastname@example.org, or contact a Business Lender directly.
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