PPP Loan Forgiveness and Tax Planning
December 27, 2021:
The approaching New Year will don a new tax season, and it’s time to consider what that means for any Paycheck Protection Program (PPP) loans you may have taken during the pandemic in order to keep your business afloat. The application was likely a whirlwind, with your business up against tight timelines and at the mercy of bank processing. When the loans were first introduced, applicants and lenders were learning the operational intracacies together in real-time.
As a quick refresher, the CARES Act introduced PPP loans during the pandemic and established that the amount of the PPP loan forgiven was to be treated as tax-exempt income on the borrowers’ federal tax returns. In other words–if you got a PPP loan, it was tax-free.
Then it got complicated. At first, deductions for otherwise eligible PPP-related expenses were disallowed, which significantly undermined the economic benefit of the loans. But a new rule in December 2020 changed that, allowing business expenses paid for with PPP funds to be written off, just like regular business expenses.
In additions, states may have different rules about treating the loans like incomes, and depending on the type of business you have–an S corporation, for example–basis rules may kick in that impact how much you can deduct further complicating things.
Unfortunately, the confusing nature of PPP loans has led to many borrowers not moving forward with their forgiveness applications. As we prepare for 2021 tax filings, here are key steps to take now regarding your PPP loan to help ensure you reap the full intended benefit of the loan:
- Contact the bank you received your loan from to find out about any processes you’ll need to follow. Some lenders are directing recipients to the U.S. Small Business Administration’s portal; others are handling the forgiveness process themselves. You can find out if your lender is participating in direct forgiveness (where you apply directly to the SBA).
- Gather and safely store any missing business expense documentation you used the loan to fund. Scrub through your emails and any physical files where you might have quickly stored receipts on a busy day to ensure you can account for and deduct valid expenses.
- If you have not moved forward with seeking loan forgiveness, get started now. The deadline to get this done is the maturity date of the loan (after you’ve used all the loan money you plan to request forgiveness for). But you are much better off not waiting until then: if you don’t apply within 10 months of the last day of the time period your loan covers, you’ll have to start making payments.
- Prepare for any tax liability you’ll have in your state. Most states are following federal guidance and not taxing forgiven PPP loans, but check to be sure so you know now what tax liability you might face.
And lastly, reach out to your tax professional and financial advisors. We are here to collaborate on your behalf to ensure you start out 2022 on the right foot.