Last year was monumental to say the least. Life as we knew it has become a thing of the past, for individuals and businesses alike. As countless companies struggled to adapt to the unforeseen challenges presented by the pandemic, the Paycheck Protection Program (PPP), which is part of the CARES Law, was a lifeline for many.
The PPP loan program was intended to help small businesses, although many large businesses also benefited. According to the Small Business Administration, over five million PPP loans have been approved, the majority of which have gone to small businesses. Ninety-two percent of loans granted were for $ 250,000 or less and 87% were for less than $ 150,000. The average loan amount was $ 100,729.
Many businesses needed money to keep their employees at work and to pay for daily expenses to keep the business open. Business owners were told the loan would also be ‘forgiven’ as long as the money was spent on payroll (60% requirement), mortgage interest, utilities, and rent over the course of the eight or 24th. weeks after disbursement. While the rules for using PPP loan funds were fairly straightforward, the tax effects remained obscure. For months, the IRS took the position that expenses paid with PPP loans that were canceled would not be deductible on the company’s tax return. Holding its breath, the nation waited for Congressional relief on COVID-19. The relief came at the last minute, including a provision that expenses paid with PPP will be deductible. Congress also reiterated that any canceled PPP loan will not be included in the company’s revenue.
Here are six things you need to know about P3 loans and your taxes:
You can deduct expenses paid with the loan proceeds: Payroll, mortgage interest, rent, and utility expenses are all forgivable uses of the loan, and Congress replaced the IRS guidelines in Notice 2020-32 prohibiting such expenses. Not only are these expenses deductible, Congress has broadened the categories of expenses that can be paid with PPP funds to include: software, cloud services, accounting, human resources, civil unrest damage, equipment personal protection and supplier costs. ordered or contracted prior to loan approval.
You are not required to include forgiven PPP funds in income: While the loan proceeds canceled by the lender are usually included in income, the PPP loan cancellation is an exception to the general rule. Businesses do not have to include debt forgiveness in their income.
You can take advantage of the law called Families First Coronavirus Response Act (FFCRA): The FFCRA is forcing some employers to grant employees paid leave for reasons related to COVID-19. However, businesses can still take advantage of FFCRA tax credits in addition to using the PPP loan.
You can postpone social charges: Under the CARES Act, employers can choose to defer payroll taxes from March 27 to December 31, 2020. Fifty percent of deferred taxes accrued in 2020 must be paid by December 31, 2021 and the remainder must be paid by December 31, 2020. December 2022.
You cannot use PPP money to pay business taxes: As mentioned above, the PPP loan can only be used for certain identified expenditure categories. You cannot use the loan proceeds to pay for income, sales, or other tax obligations.
You can file an amended tax return: If you requested a rebate but did not receive a ruling from the IRS when filing the tax return and later learn that you will not receive a full or partial rebate, you can make the corresponding adjustments by filing an amended return.
Taxes are intimidating even without COVID-19 and PPP loans to fear. Add conflicting guidelines from multiple government agencies and it’s understandable that a small business owner could feel overwhelmed. Fortunately, Congress enacted favorable provisions for PPP funds and provided certainty for small businesses that were awaiting responses before the end of the year. If you need further advice, the tax attorneys at Cavanagh law firm are always available to answer your questions.
Giselle Alexander is a Certified Tax Law Specialist in Arizona, CPA and holds a Masters in Tax Law. Giselle represents clients in all states of the tax controversy process and is one of the few tax attorneys in the United States with experience adjudicating 831 (b) micro captive insurance cases in the Tax Court. American.