The Paycheck Protection Program (PPP) was designed to help small businesses keep their doors open and get employees paid during the height of the pandemic, and it was likely a huge factor in keeping our economy afloat through the second half of 2020 and the first half of 2021. As most people know, loans from the PPP program were also available in waves, first with the initial PPP offer and then with the Second Draw PPP loans. Ultimately, the program will end on May 31, 2021, which means that companies still have a few weeks to apply through a private lender.
While easy loan approval is always a good thing, the Paycheck Protection Program (PPP) provided the added benefit of credit forgiveness to businesses that met the eligibility requirements. To get a First Draw PPP loan waived, companies had to demonstrate that employees and their wages were maintained and that the proceeds of the loan were used to fund payroll and other required expenses. In concrete terms, 60% of the loan proceeds had to be used for wage costs.
With the Second draw PPP, the proceeds of the loan were for the second period of 8 to 24 weeks after the loan disbursement. The same requirements apply to forgiveness, including employee maintenance and payment, using payroll loan proceeds and other eligible expenses, with 60% required to specifically cover payroll.
Companies that could meet all of these requirements were able to waive their entire PPP loan amounts at the federal level, and with no income tax on those amounts.
According to Phillip Kryder, CPA and Vice President, Special Projects at First internet bank, Congress’ original intent in passing the Consolidated Appropriations Act for 2021 was that waived PPP loans would be tax-free at the federal level, which is a departure from the way waived federal debt is normally treated. Not only that, Congress also wanted the expenses paid for using the PPP loans to be deductible as well.
“So for federal purposes, the loan is both excluded from income and the expenses paid by the PPP proceeds are deductible,” Kryder said. “This is a significant positive emergency response conference aimed at businesses affected by the pandemic.”
Beware of State Taxes on PPP Loans
Unfortunately, your state may still force you to pay income tax on waived PPP loans, which can be significant depending on how much you have been granted. Taylor English legal partner Christina Moore also points out that some states are still making changes to the tax treatment of PPP loans.
For example, California changed course on April 28, 2021 when Governor Gavin Newsom signed into law the law that allowed most California companies that received a waived PPP loan to evade taxes on waived amounts if they can demonstrate a drop in profits of at least 25% for at least one quarter due to the pandemic. Moore also says Virginia signed a law on March 15, 2021 that excludes waived PPP loans from taxable income. This new legislation “also provides Virginia specific deductions up to $100,000 in expenses paid with waived PPP loans.”
While many changes are in the works, here’s a rundown of some of the states that: to be currently planning to tax waived amounts on PPP loans:
- California: PPP Expenses May Be Deductible If Certain Income Changes Are Met
- Florida: Doesn’t exclude waived loan amounts from taxable income
- Hawaii: PPP Expenses Are Not Deductible
- Minnesota: Doesn’t exclude waived loan amounts from taxable income
- Nevada: Treats PPP Loan as Taxable Gross Income
- North Carolina: Taxpayers May Not Deduct Expenses Paid With Proceeds from PPP Loans for NC Income Taxes
- Texas: PPP Loans Are Taxable for the State Franchise Tax
- Utah: Does not exclude waived loan amounts from taxable income
- Vermont: PPP loans waived in 2020 were not taxable and business expenses paid in 2020 were deductible last year. Vermont does not rule out loan amounts waived for tax purposes in 2021.
How to Plan for Taxes on Forgiven PPP Loans
While PPP loans were created to help businesses survive during one of the worst economic times in our history, almost nothing in life is “free.” If your state requires it, you absolutely must start paying income taxes on loan amounts waived, whatever they may be.
Moore says she recommends that business owners “acquaint themselves with the applicable state stance on PPP lending and ensure that they are actively following or paying attention to any proposed legislation.” After all, several states have changed their position recently, and more state-based changes may be coming.
Hope for the best, but plan for the worst. After all, it seems inevitable that some states will stay on track and start paying tax-free PPP loans.
CPA Jeffrey Wood from Increase financially in South Jordan, Utah, says businesses should make sure they understand their tax liability and how it is determined, then plan to have the money available “even if it means taking out a loan to make that payment.” to do’.
“In most cases, taxable income will either be offset by deductible expenses or the waived loan income will not be taxed, but will be offset by non-deductible expenses and should not have an abnormal effect on the business and owners,” he said. he. .
If you’re not used to handling your taxes on your own and aren’t sure where to start, attorney Scott Ahroni from Robinson Brog says it may be time to call in an expert.
“Work with accountants to determine the effective tax rate that would be imposed on the waived PPP loan to ensure they have sufficient funds to cover the taxes owed,” he says. Further, if the amounts are treated as income, consideration should be given to whether estimated tax payments should be made.
In such a situation, meeting the estimated tax safe harbor can help you avoid fines, he says.