If you’re like most small business owners wading your way through the EIDL and PPP loans and the regulations and requirements that go with them, welcome to the club. As we see more entrepreneurs receiving funds from these two SBA programs, we’re also seeing more questions about what comes next. One big question? Whether or not the funds from these two loan programs will be taxed on a business’ annual income tax return. Whether you’ve got just one business or are applying for PPP with multiple businesses , you need to know what to expect down the road. For many sole proprietors and other entrepreneurs, filing taxes for 2020 seems a far-off worry they don’t want to think about right now, but the truth is: knowing what to expect can help you plan ahead once we get back to the new normal. Please note: The material contained in this article is for informational purposes only, is general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors.
Here’s some great news about federal government taxes if you receive the PPP loan: the forgivable portion of your loan isn’t considered taxable business income, and therefore, you won’t have to pay income tax on it. This isn’t typical for the Internal Revenue Service: usually, anything beyond ordinary revenue, such as capital gains or dividends, is taxed. That also included forgiven debt which is normally taxed as “cancellation of debt” income . But the CARES Act specifically deems that the forgivable component of these loans isn’t included as part of your business’ gross revenue , so you don’t have to include it in your gross receipts. While there hasn’t been guidance specifically for the $1,000 per person grant (up to $10,000) that you can receive as part of the Economic Injury Disaster Loan, (whether or not you get approved for the actual loan), we assume that, because it’s a grant and not a forgiven loan, that this amount would be taxed. Hopefully, we’ll soon see guidance published to clarify this. That leaves the rest of the loan to contend with. For EIDL, everything beyond that grant of $1,000 per employee is a loan and must be repaid. If you aren’t eligible for loan forgiveness, you’ll have to pay back all or a portion of what you borrowed. Therefore, these loans will not be taxed, just like any other loan. Additionally, you may be eligible to take a qualified business income deduction for the interest paid on either the EIDL or PPP loans if you use them for eligible business expenses, though, again, we haven’t seen specific guidance on this.
Here’s where things get murky: while the federal government has vowed not to tax PPP and EIDL loans, we don’t have the guarantee that states won’t. The CARES Act doesn’t require states to follow suit in not charging taxes on these loans, though it is the hope that they will keep in line with federal regulations. It’s expected that as we know more about the depth and breadth of COVID-19’s impact long-term on small businesses, each state’s department of revenue will publish guidance on taxes related to PPP and the EIDL grant, as well as tax credits and business income deductions that companies may qualify for.
You’ll owe 50% of the amount due on December 31, 2021, and the other 50% due December 31, 2022.
There is also a payroll tax credit for employment taxes for certain eligible companies, including (but not limited to) businesses that had to close because of COVID-19. However, if you get your PPP loan forgiven, you won’t be eligible for the Employee Retention Tax Credit.
It’s unfortunate that deciphering tax code as it relates to the Paycheck Protection Program and Economic Injury Disaster Loan program is so…taxing. The rules haven’t quite been firmed up, so Nav will keep you posted as we learn more about tax cuts and tax deductions related to PPP and EIDL.
This article was originally written on May 19, 2020 and updated on January 9, 2024.
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