Tax Implications for Businesses Receiving COVID-Related Financial Aid

In 2020, several new state and federal programs were created to help small businesses manage through the COVID-19 crisis. To date, we’ve been talking about what these programs are and how to apply for assistance.

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July 12th, 2020
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In 2020, several new state and federal programs were created to help small businesses manage through the COVID-19 crisis. To date, we’ve been talking about what these programs are and how to apply for assistance. But with any new aid program comes new tax implications. So in this edition, I want to switch gears to review in what ways your tax return will be different if you received assistance in 2020.

Taxes and PPP Loans

Question 1: Does a forgiven PPP Loan become taxable income?

Answer:   A forgiven PPP loan is tax-exempt. However—and this is big—using the loan can also reduce how much you can write-off on your business taxes. Read that again. It sounds like a small matter, but it could have a huge impact on your final tax bill at the end of the year.

Question 2: Can I write-off the payroll, rent, and utilities as business expenses if I used a PPP Loan to pay for them?

Answer:  No, the Treasury Department has said it would not allow for “double-dipping.” Accordingly, some businesses may have higher taxable revenue in 2020.

Question 3: Can I get a PPP Loan and take advantage of new Employee Retention Tax Credit (ERTC)?

Answer:  No, businesses can’t take both a PPP Loan and obtain the ERTC. Businesses can use one or the other to provide quick financial relief.

Question 4: Can PPP be used to pay business taxes?

Answer:  No, PPP loans can only be used to pay for specific expenses (payroll, rent, mortgage interest, or utilities), so taxes cannot be paid with PPP funds.

Taxes and the Economic Injury Disaster Loan (EIDL)

The EIDL option available through the SBA is to help businesses struggling with financial hardships due to COVID-19. The EIDL advance may affect your taxes. The EIDL advance is technically a grant, and because it’s a grant, it’s not part of the loan that needs to be repaid. However, unlike PPP Loan forgiveness, this grant will likely need to be included in taxable income.

I’m saying “likely” at this moment in time. That’s because the IRS has previously said that any forgiven SBA loan amounts need to be included in income. However, this is no ordinary year, and their position on it may change. For right now, assume it won’t.

Reminder: Unemployment Benefits are Taxable

Unemployment benefits are considered taxable income. That may come as a surprise, especially for anyone that is receiving them for the first time this year. These folks should know: They will have to pay state and federal taxes on the amount of money received, although they won’t have to pay Medicare or Social Security taxes on it.

Bottom line: The best way to be prepared is to assume your return for 2020 will be different. While not all issues are set in stone, it’s always better to anticipate a higher tax bill than to be caught off guard by one. If you’ve been receiving COVID-related financial aid for your business and need more guidance on your 2020 taxes, let’s set up a time to chat. We’re here to help!

 

Additional Sources
Will You Owe Taxes on Your Paycheck Protection Loan?
2020 Taxes: How the PPP, EIDL, and PUA Will Affect Your Taxes 

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