When COVID-19 relief for business owners became available in 2020, you were focused on how to apply for and receive aid. Now that the 2021 tax season is getting underway, it is time to change your focus to how the aid changes your tax obligations.
Here is a summary of four key federal COVID relief programs and how their benefits will affect your business tax liability.
Paycheck Protection Program (PPP).
PPP enabled business owners to apply for a loan of 2.5 times their average monthly payroll. Once they received the loan, they were obligated to spend the funds on approved expenses. If they followed the requirements, they could apply to have the entire loan amount forgiven.
- Tax impacts: PPP loans, regardless of their forgiveness status, are not considered taxable income. Business expenses paid for with the loan are deductible.
Economic Injury Disaster Loans (EIDL).
The U.S. Small Business Administration (SBA) expanded the EIDL program in 2020 to help businesses affected by the COVID-19 pandemic. The program included low-interest, long-term loans and emergency cash advances of $10,000 in EIDL grants.
- Tax impacts: The EIDL loan is not forgivable. Funds from the EIDL are not reported as taxable business income on your tax return. You can also lower your tax liability by deducting any expenses covered by the use of these funds. Funds from an EIDL Advance are also not reported as taxable business income. Additionally, qualifying expenses can be written off to lower your tax liability.
Employee Retention Tax Credit (ERTC).
The ERTC under the CARES Act encouraged businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business had been financially impacted by COVID-19.
- Tax impacts:What about PPP and ERTC? It gets complicated. Generally, if you received a forgivable PPP loan, you cannot claim the Employee Retention Tax Credit. However, if your received a PPP loan and repaid it by May 18, 2020 you are eligible, according to the IRS website.
Families First Coronavirus Response Act (FFCRA).
FFCRA required certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19.
- Tax impacts: The FFCRA provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.
Are you eligible for tax relief?
One way to determine what tax relief you are eligible for right now is to use the IRS COVID-19 Business Tax Relief Tool. By answering a few questions, the tool helps you determine if you are eligible.
Bottom line: Knowing how COVID-19 aid impacts your tax obligations is complex. As always, if you need guidance to manage the complexities, please reach out to a tax professional.