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The Paycheck Protection Program (PPP) has proven to be one of the most extensive small business loan programs ever launched by the US government. Over 5 million loans totaling over $ 525 billion were issued in the program’s first draw, which ended on August 8, 2020.
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The second drawdown of the PPP was launched on January 19, 2021, with $ 284 billion available for disbursement and a few key differences. Eligible businesses must have 300 or fewer employees, whereas for the first emergency stimulus package, a business had to have 500 or fewer employees. In addition, the maximum loan amount is now $ 2 million, while the first PPP was $ 10 million.
However, the most notable of the second PPP is that reimbursable expenses have been extended. In the first bill, businesses were eligible for a loan forgiveness if the funds were used for wage costs (60%) or payments on mortgage interest, rent, or company utilities.
Now, however, reimbursable expenses have been broadened to include those related to operations (HR, accounting, IT), property damage, suppliers, and worker protection (changes to facilities and personal protective equipment necessary to operate in full. security under Covid.)
While this may be good news for small businesses that still struggle to stay afloat, another problem looms – taxes.
Since the passage of the CARES law (Coronavirus Aid, Relief, and Economic Security Act) in March 2020, tax guidelines have changed several times. It was planned because the loan program was brand new. However, the tax guidelines changed again when the Supplementary Appropriations for Coronavirus Response and Relief Act (CRRSAA) was passed in December 2020.
Like a small business lenderI’m used to answering questions from business owners about various loan programs and offering a range of solutions – and flexibility is certainly the key to this pandemic.
Let’s take a look at some of the burning questions some of my clients have had regarding the treatment of taxes when it comes to PPP loans. Of course, the landscape changes and new laws can be passed, so it’s important to stay in close contact with your CPA or tax attorney for the most comprehensive and up-to-date advice.
Canceled PPP loans and taxable income
Logically, if you get money and you don’t have to pay it back, that should be considered income, right? A PPP loan can be canceled as long as at least 60% has been spent on personnel costs.
However, since the CRRSAA was enacted in December 2020, Congress has made it clear that a The canceled PPP loan is completely tax exempt and is not taxable income.
Another good news is that business expenses paid with PPP funds can be written off like current business expenses. This means that the payroll, rent, utilities and for the second PPP draw, business services, software / IT and real estate renovations / modifications can also be written off.
Additional tax credit programs
To give small businesses an extra boost, the American Chamber of Commerce recalls that companies now have the possibility of contracting a PPP loan and simultaneously obtaining the Employee Retention Tax Credit (ERTC) for their 2020 and 2021 taxes, provided that the PPP and the ERTC do not overlap not and cover the same payroll expenses.
By taking advantage of another program, businesses can use the Families First Coronavirus Response Act (FFCRA) tax credits while obtaining and using a PPP loan. As with the ERTC, companies can take advantage of this program as long as the funds do not cover the same expenses.
Employers can also defer payroll taxes (as specified in the CARES Act) from March 27, 2020 to December 31, 2020, even after a PPP loan is canceled. In order to give business owners time and flexibility, 50% of the deferred taxes accrued in 2020 must be paid by December 31, 2021, and 50% of the deferred amount must be paid by December 31, 2022.
What PPP funds cannot be used for
Taxes cannot be paid with the proceeds of a PPP loan. The SBA has significantly expanded the permitted uses of P3 funds, but unfortunately they cannot be used to pay a company’s taxes.
Small businesses that do not qualify for P3s still have several alternative financing options available to them and should consider all sources that make sense. Companies often use a combination of financing strategies and some have set them up as plan B. During these times, it is wise to be resourceful.