United States
Updated: May 7th, 2021
The government relaunched the Paycheck Protection Program (PPP) earlier this year, allocating an additional $284.5 billion to businesses in need. With the March 31 application deadline fast approaching and tax season halfway through, small businesses are starting to wonder how these loans will impact their taxes.
Thanks to recent amendments and the passing of the second stimulus bill on December 27, 2020, the government has passed some significant tax advantages for businesses. They’ve spelled out explanations regarding taxable income, tax deductions, and tax credits—and everything is looking like a win-win for small businesses.
Below, we’ll cover everything you need to know about PPP tax implications. First, let’s do a quick recap on how the PPP loans work.
Congress has provided additional PPP funding to both first-time and second-time loan drawers. This means that those who received a PPP loan last year and those who didn’t both qualify for financing in 2021, as long as they meet the qualifications:
The government doesn’t do the lending—they just provide a guarantee on a large percentage of the loan to reduce the risk for lenders. SBA-approved lenders are the ones footing the actual cash, and then the SBA provides small businesses with a check equal to the forgivable amount they qualify for.
Businesses can qualify for PPP loans up to 2.5 times their average monthly payroll costs. Business applying for their second draw PPP loan in the food services or accommodations can qualify for PPP loans up to 3.5 times their monthly average payroll costs. If the business spends their PPP funds on eligible expenses, then the government will convert these loans into tax-free grants—which is essentially free money for your business.
In addition to spending funds on the right expenses, businesses must also follow other rules:
Apply now to discover if you qualify for a second round of PPP loan funding.
Traditionally, all government grants are viewed as business income—thus, making them taxable.
“Historically and forever, if you have a business loan and it is forgiven, that automatically is taxable income. It’s been in the internal revenue code forever,” says Keith Hall, president and CEO of the National Association for the Self-Employed.
However, updated guidance clarifies that forgiven PPP loan amounts are an exception and are not considered taxable income. This applies even if your PPP loan is only partially forgiven. Any forgiven amount is not considered taxable income.
“If it is forgiven, it will not be taxable income. Period,” says Hall.
This means you don’t need to plan on paying any taxes for the PPP loan funds you receive. The government intended PPP loans to be a lifeline for struggling businesses, and it realized a tax burden would be counterintuitive to the purposes of the program.
Previously, all PPP expenses were considered non-tax-deductible, but the December update has reversed that decision and made all eligible PPP expenses tax-deductible.
The 2021 Appropriations Act states, “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided.”
Yes, you can. As of December 2020, your business can now take out a PPP loan and obtain the ERTC for both 2020 and 2021.
However, there’s an important caveat. You can’t claim the ERTC for any wages paid with forgiven PPP funding. You can claim the credit for any wages paid above and beyond the amount forgiven or outside of your 8- or 24-week covered period.
The ERTC has also expanded to help business owners through the first half of 2021. The credit allows employers to claim a maximum of $5,000 per employee for all of 2020, and it now allows for a maximum of $14,000 per employee through June 30, 2021.
The stimulus bill also expands eligibility to allow more businesses to qualify for the credit.
No. The recent update to the PPP loan expanded the list of eligible expenses, but taxes are not included.
Originally, PPP loans could only be spent on payroll costs, rent, mortgage payments, and utility payments. Updated guidance has expanded that list to cover operations expenditures, worker protection expenditures, property damage costs, and supplier costs.
If you use your PPP loan to cover existing business taxes, that portion will not be forgivable.
Good question. While the IRS has classified PPP forgiven funds as non-taxable income and tax-deductible, certain states have announced their tax laws. Here’s a list of the 19 states (as of February 26, 2021) that have decided to either tax forgiven loans or disallowed PPP loan expense deductions:
State laws are changing rapidly, so check for your state’s updated PPP rules before filing your taxes.
You’ll need meticulous records to apply and qualify for loan forgiveness. Plus, you’ll need these records come tax season when you claim your business tax deductions.
Keep track of exactly how you use your PPP funds to not run into any hiccups when applying for forgiveness and deductions.
For more on how PPP works check out our end-to end guide.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.
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