The COVID-19 pandemic has impacted the U.S. economy on a scale unseen since the Great Depression. Many businesses, especially those that rely on in-person traffic, face the prospect of having to shutter their doors permanently. The Paycheck Protection Program, which was part of the original $2.2 trillion coronavirus relief package passed by Congress, can provide a lifeline to struggling businesses. The program offers loans to companies that need help meeting operating and payroll expenses during the pandemic. These loans can also have tax implications for businesses, so it is essential to consult a specialized CPA for small businesses before applying for or obtaining funds through the PPP.
The loans provided through the PPP are forgiven if they are used for payroll and certain other qualifying expenses. Typically, loan amounts that are forgiven are included in gross income and subject to federal income tax. That is not the case with PPP loans. The coronavirus relief act specifically states that any amounts forgiven under the PPP are excluded from gross income for federal tax purposes. It is not clear whether the quantity forgiven will be subject to state or local income taxes.
According to the most recent guidance from the Internal Revenue Service, expenses paid with PPP funds that would usually be tax-deductible, such as wages, will not be tax-deductible. This is to ensure that businesses don’t receive a double tax benefit in the form of a forgivable loan and a tax deduction. Of course, Congress has the authority to override the IRS’s stance, so this could change. Business owners should also be aware that the amount of the loan that is forgiven can be reduced if the funds are used for non-qualifying expenses or if the business does not meet specific requirements, such as maintaining full-time employees or their salaries. Scott Boyar, CPA in Charlotte can help you understand how a PPP loan will impact your small business’s tax status.
Scott Boyar is a Charlotte-based CPA for small businesses specializing in bookkeeping and tax planning and preparation services. If you are a small business owner needing help navigating the tax consequences of the COVID-19 pandemic, schedule a consultation with Scott today by calling 704-527-2725.