Does Your PPP Loan Count As Income for Tax Filing Purposes?

What is the CARES Act?

People have wondered. And we’re here to clear up any confusion.

When the COVID-19 pandemic began to impact the American economy, the CARES Act set up access to Payroll Protection Plan (PPP) loans. These were designed to allow small business owners to continue making payroll even if the pandemic and subsequent shutdown reduced their earnings. In short, it was an effort to keep the economy stronger by keeping people employed for longer.

The merits of this program can be debated, and many people ended up losing their jobs anyway, but some businesses were able to stay afloat thanks to these loans. However, they were still loans under the CARES Act, meaning they do need to be repaid, and they do have to factor into the company’s overall financial picture. As the end of the year draws near, what many business owners are asking is if they’re going to need to consider them for tax purposes.

Loan Forgiveness

The answer depends on the loan forgiveness program and whether or not the company is granted either full or partial forgiveness of those loans. If such forgiveness is handed down, the loan becomes a grant, and it does not count as income. If partial forgiveness is given, that means that only part of the loan comes out of the company’s income. Naturally, a decision not to forgive the loan means that, for tax purposes, it still counts for taxes, just like any other loan.

The IRS did put out Notice 2020-32 last spring, saying that PPP-funded business expenses that would usually be deducted would not qualify for the same deductions. In short, a company can’t take the government money, spend it on deductible expenses, and then deduct those operating expenses on their taxes.

When to File?

One interesting question that has been raised in conjunction with this process is simply when a company should file to ask for loan forgiveness.

In some cases, immediate filing is likely best. For instance, loan forgiveness is ensured if a minimum of 60% of the money was used in the 24 weeks after the loan was handed down. If that criteria has already been met, some have argued that it is wise to forget about deductions that may be lost and ask for forgiveness right away. This can always be amended if things change in the future or the IRS provides new guidelines.

Others say that it’s wise to wait until the guidelines are clarified and important decisions are made. For instance, the American Institute of Certified Public Accountants (AICPA) has asked that all loans be forgiven if they did not exceed a total value of $150,000. This has not happened yet, but, were it to happen in the future, it could guarantee complete forgiveness for many small business owners, and they could then address their tax concerns with more comprehensive guidance.

Your Next Steps

As a business owner, 2020 has no doubt been a year filled with challenges and complexities. The PPP loan program is no exception. When you work with us here at Rialto Accounting, you get an experienced financial team that puts your needs first and that can help you sort out all the details, so you don’t have to.

A.J. Dote