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Update, September 1: The worker Retention Tax Credit continues to be extended through 2022 as a result of the American Rescue Plan. Additionally, while PPP loans aren’t taxable at the federal level, state tax implications vary by state. Information outlining the present tax implications by state continues to be added. We'll still provide updates if statuses change in the future.
Update, January 11: The stimulus package bill was passed and the Sba (SBA) announced the PPP program will open now. Read our post PPP Round 2: Main Differences Between your First & Second Round Of PPP Funding to find out more.
Update, December 23: President Trump called the bill a “disgrace” on Tuesday evening while threatening to possibly veto it. House Democrats have since drafted a stand-alone bill that will answer among the President’s demands — $2,000 stimulus checks. The House is set to reconvene December 24.
Update, December 22: Congress passed the balance late Monday night. It now goes to President Trump for his signature.
As a small company owner, odds are you had been affected by the COVID-19 pandemic. Whether this meant shutting your doors temporarily, reducing your number of customers, or shifting to remote work, the pandemic has undoubtedly caused some challenges for the business. If you were like countless other small businesses, you have a minimum of a little bit of financial relief with the US government’s Paycheck Protection Program (PPP) or the Economic Injury Disaster Loan (EIDL) advance.
So, now, here we are. You’ve received your funding, you’ve spent it, and maybe you’ve even requested loan forgiveness. But there’s still a nagging thought in the back of your mind: So how exactly does this affect your taxes? Do you have to pay taxes in your PPP loan? Will you be responsible using the IRS for that funding you received using the EIDL advance?
Digging through IRS publications or trying to decipher information released by the SBA can make you scratching your face. In this article, we'll break the tax implications down for you personally to ensure that it’s easily digestible. We’ll cover how PPP loans and EIDL advances affect a state and federal taxes, so you can be fully prepared when it’s time for you to file.
One aspect to note is the fact that laws surrounding these government loans have changed over the last couple of months. We will continue to monitor these changes and update this informative article accordingly.
New Information: The way the PPP Loan Affects State & Local Taxes
Under the Coronavirus Aid, Relief, and Economic Security Act, the way that forgiven loan money is taxed in the federal level is different than usual (more about that later). While it’s clear that forgiven loan funds are to not be contained in taxable income for federal tax purposes, things become a a bit more complicated with regards to state and local taxes.
While your forgiven PPP loan funds might be exempt from federal taxation, you might still be asked to claim these funds as taxable income when filing your state taxes. The way your forgiven loan is taxed in the state level is dependent upon your state’s compliance with the Internal Revenue Code (IRC). Over 20 states have rolling conformity, meaning that they conform to the IRC as changes and amendments occur.
Other states, however, have different rules with regards to IRC conformity. This includes:
- Static Conformity: Also referred to as fixed-date conformity; conforms using the IRC occurs on the specific date
- Annual Conformity: Conforms with the IRC with an annual basis
- Selective Conformity: Conforms with specific provisions from the IRC
Still confused? Don’t worry — you don’t have to be a tax professional to know what this signifies for your business. What it comes down to is the fact that different states have different conformity rules. In other words, while there are no federal tax implications for the forgiven PPP loan, there might be state implications based on where you reside.
How does this affect both you and your business taxes? In some states, you may be required to include PPP funds as part of your taxable income. To further complicate matters, some states also provide restrictions on deducting business expenses taken care of using PPP loan funds.
As using the other information contained within this article, rules may be susceptible to change. We here at will continue to update this article as changes occur.
Which States Are Taxing PPP Loans?
Understanding why some states are taxing PPP loans is confusing for anybody without tax experience. Instead of wading blindly through tax laws, make use of this chart to determine how taxation of PPP funds is handled where you live. This handy resource shows which states allow you to exclude PPP loans as taxable income. It also shows which states permit you to lower your tax liability by deducting expenses taken care of using PPP loan funds.
While most states make it clear whether PPP funds are taxable and/or deductible, there are some things to note in case your clients are situated in one of the following states:
- California: An expense deduction is not allowed for publicly owned companies in California. Additionally, companies that did not have a decline of at least 25% in gross receipts between 2022 and 2022 can not deduct expenses taken care of using forgiven PPP loan funds.
- Nevada: While Nevada doesn't have a situation tax, it does possess a Gross Receipts Tax (GRT), tax that is put on the gross sales of a business. In Nevada, forgiven PPP funds are to become included in taxable gross revenue. Additionally, no deduction for business expenses taken care of using PPP funds is allowed.
- Ohio: Ohio has both a GRT and individual tax. For individual tax purposes, forgiven PPP loans are excluded from taxable income and business deductions are allowed. However, underneath the GRT, deductions for business expenses paid for using PPP funds are disallowed.
- Rhode Island: In Rhode Island, only forgiven PPP loans of $250,000 or less can be excluded from taxable income.
- South Dakota: South Dakota has no state tax.
- Virginia: In Virginia, only the first $100,000 of PPP funds that were allocated to business expenses could be deducted.
- Washington: Washington levies a GRT. Under the GRT, deductions for business expenses taken care of using PPP funds are disallowed.
- Wyoming: Wyoming doesn't have state income tax.
How The PPP Loan Affects Federal Taxes
The Small Business Administration’s PPP loans gave billions of dollars to inspire small businesses to maintain their payroll and keep their workers employed. According to the SBA, over 5 million businesses received loans through this funding program.
Under this program, small businesses could receive up to two-and-a-half times their average monthly payroll (with a maximum cap of $10 million) to pay for payroll along with other critical business expenses, for example utilities, mortgage interest, and rent paid under a lease.
When spent on approved expenses, these loans are 100% forgivable, and therefore the money is not necessary to be repaid. For expenses that weren’t around the SBA’s list, funds could be repaid having a low interest rate and long repayment terms.
This program helped countless businesses by giving over $5 billion to eligible applicants. For many, this funding came at the proper time, allowing smaller businesses to keep their doors open and employees on staff. However, approaching the end of the entire year, the program is over, and businesses are now trying to get loan forgiveness or calculating how much money they owe. For a lot of business owners, though, the end of the year also signals tax season coming and the looming question: The way PPP loans affect federal income tax returns?
Are PPP Loans Taxable?
For federal tax purposes, PPP loan funds that have been forgiven are excluded out of your business’s gross income. Quite simply, any portion of your PPP loan that has been forgiven won't be included as part of your company’s taxable income.
PPP loan funds that were not forgiven act like other loans. Unforgiven PPP loan funds are not included in your taxable gross income.
PPP Loans & Tax Deductions
The IRS issued a notice that further clarifies how PPP loan funds ought to be handled for federal tax returns, initially making it so that expenses paid with PPP funds could not be claimed as deductions.
Fortunately, in December 2022, Congress made a change that superseded this notice, stating, “no deduction shall be denied, no tax attribute will be reduced, and no basis increase will be denied, by reason of the exclusion from gross income provided,” in Section 1106 of the CARES Act.
In layman’s terms, which means that expenses paid with PPP loan proceeds could be claimed as deductions.
In summary, this is what you should expect from your PPP loan come tax time:
- Forgiven loan funds are not counted as taxable income and could be deducted from your business expenses
- Loan funds that aren't forgiven aren't counted as taxable income and may be deducted from your expenses
How The EIDL Loan Affects Taxes
Another loan you may have taken advantage of during the COVID-19 pandemic is the Economic Injury Disaster Loan, or EIDL. One notable difference between the EIDL for all those impacted by the coronavirus and past EIDLs would be that the Sba offered funding of up to $10,000 for qualifying small businesses. This advance allowed businesses to get funds quickly. While EIDL funds are necessary to be repaid, the EIDL Advance would be a grant that does not have to be paid back.
Funds obtained with the EIDL and EIDL Advance might be used as capital or to cover any other operating expenses for businesses impacted by COVID-19.
Is The EIDL Grant Taxable?
If you received the EIDL loan, taxes on these funds work like any other business loan taxation. In other words, funds in the EIDL aren't reported as taxable business income on your tax return. You may also lower your tax liability by deducting any expenses covered by the utilization of these funds.
Initially, funds from EIDL Advances may be reported as taxable income. However, this decision was reversed under the Consolidated Appropriations Act. Now, funds from an EIDL Advance are not reported as taxable business income. Additionally, qualifying expenses can be wiped off to reduce your tax liability.
How The worker Retention Credit Affects Taxes
Small business people may qualify to assert the worker Retention Credit. This credit is available to businesses with 500 or fewer employees that also meet the following criteria:
- Required with a governmental authority to completely or partially suspend operations as a result of COVID-19, or
- Experienced a gross decline in receipts with a minimum of 50% in a calendar quarter in 2022 when compared to the same quarter in 2022
If you are eligible, you could get a credit as high as 50% of eligible wages paid per quarter to every employee. Maximum wages per quarter per employee are capped at $10,000. That means you are able to claim a more $5,000 per quarter per employee. You don't need to hold back to claim this credit whenever you file your annual income taxes. Instead, credits can be claimed in your quarterly tax return.
Additional legislation was enacted that extended the Employee Retention Credit through 2022.
Under the Taxpayer Certainty and Disaster Tax Relief Act of 2022 and also the American Rescue Plan of 2022, employers can claim a tax credit against their share of Social Security taxes comparable to 70% of eligible wages paid to employees from January 1, 2022, through December 21, 2022. The utmost credit per quarter under these laws is $7,000 per quarter per employee. For 2022, a more $28,000 per employee can be claimed like a credit.
If You Received A PPP Loan, Expect A Tax Audit
The SBA and also the US Treasury have announced that PPP loans more than $2 million will be audited. Loans which are under $2 million are subject to an audit, and contains been reported much lower loans have been scrutinized. Exactly what does this suggest for you? In short, all recipients from the PPP loan should be expecting to become audited, while there is a higher probability the IRS will audit you.
“Audit” is a pretty scary word, particularly if you’ve never faced one before. However, as long as you have your records in order and used funds appropriately, the audit process should be pretty painless. Here’s how to make the process go as smoothly as possible:
- Don’t Procrastinate: Sure, an audit could be scary but ignoring it won’t make it go away. Review your notice carefully and start compiling your documentation as quickly as possible.
- Keep All Records: Receipts, statements, payroll records, and PPP documentation should be continued file for a minimum of six years after your PPP loan is fully repaid or forgiven.
- Make Copies: If you’re sending off documentation, make sure to send copies. Always retain your original documentation in case you need it at another time.
- Hire A CPA: A CPA, unlike a regular accountant, can represent and defend your company against the IRS, if required. An accountant los angeles may also offer important advice for tax preparation and future audits.
Did you have a PPP loan, and you’re being audited? Take a look at our post, PPP Loans & Tax Audits: What Your Business Must Know, so you’ll understand what to anticipate.
Other PPP & EIDL Tax FAQs
Didn’t discover the answers you were looking for? Check out some of the most-asked questions about how PPP and EIDL loans may affect your taxes.
Does my PPP count as taxable income?
No. Funds from your PPP loan — whether forgiven or unforgiven — are not counted as taxable income in the federal level. Additionally, you will have the ability to claim a deduction in your federal return for expenses paid making use of your PPP funds.
If my PPP loan is not forgiven entirely, does which means that it counts as taxable income?
As with other business loans, funds out of your PPP loan that are not forgiven don't count as taxable income.
How do you get my PPP loan forgiven?
To get the PPP loan forgiven, you'll want spent your funds on qualifying expenses, including:
- Payroll
- Mortgage interest
- Lease or rent payments
- Utilities
You must also have maintained your employee headcount and salaries to be eligible for a forgiveness. The SBA offers additional assistance with qualifying for loan forgiveness.
If your business qualifies, you will need to fill out a PPP loan forgiveness application. Borrowers that received financing of $150,000 or less can use Form 3508S. Borrowers with loans over $50,000 can fill out Form 3508 or Form 3508EZ. Once completed, submit the form towards the lender that's servicing your loan.
Alternatively, if you received a loan of $150,000 as well as your lender has signed up, you may be permitted to make an application for forgiveness through the SBA’s Direct Forgiveness Portal.
Is an EIDL Advance taxable?
Your EIDL Advance isn't counted as taxable income on your federal tax return per changes implemented through the Consolidated Appropriations Act.
Can one discount payroll along with other business expenses basically used a PPP loan to cover them?
If you received a PPP loan as well as your loan was forgiven, you can write off payroll and other expenses that were paid for with one of these funds. Expenses that were not paid using PPP funds can still be written off as usual.
Even in case your PPP loan wasn't forgiven, payroll along with other business expenses might be wiped off in your tax return.
Can I use my PPP loan to pay business taxes?
No. Funds out of your PPP loan may only be employed to cover payroll costs, utilities, rent or lease payments, or mortgage interest. PPP loan proceeds can’t be employed to pay business taxes.
Can one pay taxes with my EIDL loan?
Yes. While there are some restrictions how EIDL funds are spent, there is no rule in position prohibiting you against paying your income taxes with such funds.
Can one defer payroll taxes and get a PPP loan?
Businesses that have received a PPP loan can defer payroll taxes until any any area of the loan continues to be forgiven.
Will PPP loans be audited by the IRS?
According to the US Treasury, all PPP loans that exceed $2 million is going to be audited. The IRS could also audit other loans, so it's best to be prepared, even if you received a much smaller loan.
Will EIDL loans be audited?
When you obtain your EIDL loan, you accept spend the funds deliver to certain business expenses. In your loan agreement, you accept maintain records and supply this info towards the SBA to become audited if required. Nevertheless there is an opportunity you may not be audited, don’t skip over this critical step. Keep your records and be ready to respond if the audit occurs.
How do PPP loans affect state and local taxes?
Depending on the state you reside in, you may have to incorporate your PPP loan as taxable income. Additionally, claiming deductions for expenses paid for using PPP loan funds isn't allowed in a few states.
Which states are taxing forgiven PPP loans?
Currently, Florida, Nevada, and Utah are taxing forgiven PPP loans. Rhode Island is also taxing forgiven loans that exceed $250,000.
