Tax Implications of SBA PPP Loans

BY: Tara L. Grays

The U.S. Small Business Administration Paycheck Protection Program … are we done yet? Just kidding. From the get-go, there have been a lot of questions regarding the federal government's guidance, how the program is supposed to work, and whether the loans are really 100% forgiven.

The answer to the latter is … well, maybe. Keep reading.

The Paycheck Protection Program was designed to help small businesses keep their employees on staff and paid normal wages. This life line, it stood to reason, would at least partially offset the sudden tsunami of unemployment that swept the country at the onset of the pandemic.  

Because of the immediacy with which the initiative needed to be launched, it was rolled out with two glaring issues unresolved:

  1. The program wasn’t fully defined, contributing to uncertainty about “the rules.”
  2. Only so many funds were made available.
So, businesses needed to decide if they were going to apply with their local bank (if their local bank was participating) without the benefit of knowing all of the pertinent details up front.

The loans, it was said, were 100% forgivable, as long as they were utilized for qualifying expenses, including:

  • Payroll and payroll expense items
  • Health benefits
  • Utilities
  • Rent
  • Certain interest expenses
Further, each loan would be forgiven as long as at least 60% of the total funds received were used toward payroll (lowered from the initial 75%). The maximum loan amount that a business could apply for was its 2019 average payroll expense, divided by 12 months, and multiplied by 2.5. The funds were initially supposed to be used within eight weeks of receipt, but that was later changed to 24 weeks.

When Should You Apply for Loan Forgiveness?

Consider this common scenario: your business decided to apply for a PPP loan, was approved and received funds, and spent the money. Now it is the end of the year, you need to apply for forgiveness, and you’re not sure how this will affect your 2020 tax filing.

First, I highly recommend that, if you've already received and spent your PPP funds, and you have supporting documents that show that you did, indeed, spend the money on qualifying expenses, you apply for forgiveness.

Do it now – or maybe yesterday. Why? Because the actual forgiveness of your PPP loan – or probable forgiveness of your PPP loan – affects how you will file your taxes. More specifically, it affects your expenses for the tax year.

Wipfli LLP wrote a very concise article on this exact topic, but here is the gist:

The IRS has provided guidance on how PPP loans, and the forgiveness of those loans, will affect PPP-funded expenses. Basically, if you used the PPP funds on payroll expenses, and that PPP loan was 100% forgiven, the expenses your company paid for with the PPP funds cannot be expensed in this year’s taxes (up to the loan amount). The IRS decided that this would be considered “double dipping.”

What if you haven’t applied for forgiveness of your PPP loan yet, but are filing your taxes? The IRS says that, if your PPP loan forgiveness is reasonably expected, your company cannot expense PPP-funded expenses. This, of course, opens up all kinds of other questions about nondeductible expenses. As an example, several entities received PPP funds lower than the amount of qualified expenses incurred in the same time period. How should that entity allocate their PPP funds, as that decision could affect other tax deductions or credits? Or, as Wipfli LLP also asked, what about self-employed companies that don’t have these related expenses, which the deduction would deny – does that give them a more favorable result?

Also, since we are discussing “double dipping,” it is worth mentioning that while the PPP loan program was going on, SBA also rolled out the Economic Injury Disaster Loan (EIDL) program that had an advancement of $1000 per employee, up to $10,000, that was considered to be grant funding or 100% forgiven. These funds were to be used for almost the same expenses as those of the PPP, but had a bit more leeway at a higher percentage of interest for the funds extended beyond the advancement amount.

Basically, the EIDL program was another that the SBA set up to directly get funds to small businesses, mainly for payroll, though also for other operating expenses. Though it was maybe not always clear as the programs were being rolled out, SBA stated that any entity that applied for and received both PPP and EIDL funds would be considered “double dipping,” and the amount of the EIDL loan would reduce the forgiven amount of the PPP loan. That means, if you received both funds, subtract the amount of the EIDL funds from the received PPP funds, and this would be your remaining loan balance, to repay at a 1% interest rate (assuming that all expenses for the PPP funds were spent on qualifying expenses during the allotted timeframe.)

PPP is just one aspect of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. There are several others that will likely affect your business and individual tax filings this year, such as employer tax credits for paid leave, dollar-for-dollar tax offset against payroll taxes, and waived required minimum distributions of your IRA, to name a few.

Any way you look at it, the new tax rules will likely not only reduce current and future tax liabilities, but your entity may also benefit from filing an amendment for previous tax years. Of all the years to rely on a Certified Public Accountant (CPA) to file your business and individual tax returns, this is probably the year. Make sure you reach out to your CPA or your financial partner for a recommendation on who to talk to this year.

Tara L. Grays

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