The coronavirus has wreaked havoc on the economy and particularly on small businesses. The CARES Act was enacted and signed into law on March 27, 2020. The PPP program is being implemented by the Small Business Administration supported by the Department of the Treasury. The program was designed to help small businesses (as defined by the Small Business Administration) to retain their employees by paying payroll-related expenses, mortgage interest, rent, and utilities. Businesses were allowed to apply for a loan through August 8, 2020.
The loan provides for 8 weeks of payroll assistance if it was taken out before June 5, 2020, and up to 24 weeks for those loans taken after that date. The amount of the loan was based on two and a half months' average payroll in the previous year. At this time the cutoff date for eligible expenses is December 31, 2020.
What is particularly attractive about the PPP loan is the possibility that it will be forgiven and repayment not necessary. Forgiveness, however, requires that very strict criteria be followed, but in return there is significant relief for owners when it comes to keeping their business afloat.
In order for your PPP loan to be forgiven, you must maintain your pre-pandemic employee numbers or quickly rehire any people that have been laid-off or furloughed. It is required that you make an effort to bring back employees among other criteria to ensure that you will be granted forgiveness.
Forgiveness isn't the end of the road, however. Even if you have had your loan forgiven you may be wondering where that leaves you when you file your end-of-year taxes and how it affects your quarterly tax liability.
Will I Pay Tax on My PPP loans?
The answer is no, they are temporary cash and don't add to your overall wealth. A forgiven PPP loan does count towards your taxable income. The primary goal of this loan money is to help struggling businesses, and as a result it will not become a tax burden upon them.
Usually, when a debt is forgiven, the amount forgiven is taxable. New IRS guidelines have been released that make it seem this may not be the case with a forgiven PPP loan. It will be treated as a grant and therefore not be taxable. With the changing nature of the CARES Act and PPP loans, before assuming this is the final word, talk to your tax accountant. You may find that you owe more taxes even though the PPP loan is not taxable because you have more taxable income without your normal payroll expenses. The rules in Notice 2020-32 are being examined and you should keep informed about any changes.
Don't Be Afraid To Consult a CPA
Businesses of all sizes have been struggling and trying to keep up with all the changes in the rules governing PPP loans and their forgiveness can make your head spin. Having a trusted accounting firm and tax advisor who has your back and is knowledgeable about all the latest news and changes from the federal government is vital. At Chandler & Knowles CPA we have a team of experts who work to make sure clients have the latest information and are able to make the right decisions. If you have questions about your taxes and PPP loan, contact us and let us help you navigate your way through the maze of rules and regulations.