In the wake of the COVID-19 pandemic, the U.S. government launched several programs to offer financial benefits to small businesses. While we’ve outlined the CARES Act and the Payment Protection Program Flexibility Act of 2020 and explained their differences, there’s one other thing that needs to be discussed – the impact on your tax return. Every type of financial aid program comes with tax implications.
Here are some of the most commonly asked questions from business-owners who have received COVID-related assistance.
Taxes and PPP Loans
Question 1: Does a forgiven PPP Loan become taxable income?
Answer: A forgiven PPP Loan is tax-exempt. However, using the loan can also reduce how much you can write-off on your business taxes. It’s important to keep that in mind when applying for the loan.
Question 2: Can I write-off payroll, rent, and utilities as business expenses if I used a PPP Loan to pay for them?
Answer: No. The IRS has existing tax laws intended to prevent “double-dipping.” Business expenses paid with PPP funds that are forgiven cannot be deducted.
Question 3: Can I get a PPP Loan and take advantage of new Employee Retention Tax Credit (ERTC)?
Answer: No. As the government’s intention was to provide quick financial relief, it’s either one or the other when it comes to a PPP Loan and the ERTC.
Question 4: Can PPP be used to pay business taxes?
Answer: No, PPP loans can only be used to pay for specific expenses, such as payroll, rent, mortgage interest, and utilities.
Taxes and the Economic Injury Disaster Loan (EIDL)
The Economic Injury Disaster Loan (EIDL) program provides financial assistance to small businesses and non-profit organizations financially struggling as a result of a declared disaster. While a PPP Loan is tax-exempt, receiving an EIDL will affect your taxes. The EIDL is technically a grant, which means it’s not a loan that needs to be repaid. However, unlike a PPP Loan, which can be forgiven, this grant will need to be categorized as taxable income (and does not have to be repaid) – the loan component will need to be repaid under the terms of the loan.
Taxes and Unemployment Benefits
It might come as a surprise to anyone who’s receiving them for the first time, but unemployment benefits are considered taxable income. Anyone collecting unemployment will have to pay state and federal taxes on the amount of money received.
To be fair, this year has been unlike any other year. So, it goes without saying that small business owners should be prepared for their 2020 tax returns to be equally distinctive. If you’ve received COVID-related financial aid for your business and need filing guidance, let’s set up a time to chat. Boris Benic and Associates is always here to help.