The Paycheck Protection Program PPP is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP is intended to provide American small businesses with eight weeks of cash-flow assistance to cover payroll and other costs through forgivable, federally guaranteed loans. If the taxpayer spends the funds on these types of expenses, all or a large portion of the PPP loan will be forgiven. However, there are several critical tax impacts that should be considered. Here are 7 important things to know about the tax impact of the PPP from the dedicated team at Orlando based CPA Accounting & Tax Services.
1. A taxpayer that receives a PPP loan is ineligible to claim the employee retention credit — a refundable payroll tax credit that was also established by the CARES Act.
2. For taxpayers that have had a PPP loan forgiven, the Internal Revenue Service (IRS) announced that no tax deductions will be allowed for expenses that are funded by PPP loans that are later forgiven in IRS Notice 2020-32.
3. Forgiveness is available ONLY if the taxpayer spends the PPP funds on certain expenses, such as: payroll, mortgage interest, rent, and utilities.
4. To obtain forgiveness of 100% of the PPP loan, at least 75% of the PPP funds must be spent on payroll costs. The remaining 25% can be spent on the other qualifying expenses. To qualify for forgiveness the taxpayer must also satisfy certain employee retention standards. Generally, these items are all deductible expenses. Under the current IRS guidance, if a taxpayer uses PPP funds for these expenses and the taxpayer’s PPP loan is later forgiven, the taxpayer is not eligible to deduct any such expenses.
5. The amount of the forgiven loan is not considered cancellation of indebtedness income that is subject to tax.
6. Forgiveness of the loan should not result in any negative federal income tax consequences.
7. Once a taxpayer has a PPP loan forgiven, the taxpayer cannot defer any subsequent payments of payroll taxes.
Navigating through the tax implications of the Payment Protection Program can be difficult. Contact the professionals at CPA Accounting & Tax Services to help guide you through tax season and beyond. We specialize in Business Accounting Services, Individual Tax Services, International Tax Services and Tax Resolution Services. We have offices in Orlando, Florida and service clients worldwide. Find out how we can serve all of your accounting needs by contacting us today.