Will the Coronavirus Relief Loans (SBA,PPP, EIDL) Affect My Taxes?
When the coronavirus pandemic descended in early 2020, the world was caught unprepared. Businesses in the United States and elsewhere experienced major disruption, and governments took action to keep businesses and the economy afloat. Unfortunately, as the pandemic has worn on, continued assistance has been required into 2021. As the tax year draws to a close (and the pandemic continues), many are wondering about coronavirus tax relief and the impact of coronavirus relief bills on their income tax filing.
Let’s talk about some of the various forms of COVID-19 relief, and what you need to do about them at tax time.
The Paycheck Protection Program (PPP) was authorized in 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The deadline to apply for the program was initially June 30, 2020, later extended into August. It was then reopened in January 2021and continued through May 31, 2021. The $953 billion PPP program was intended to help qualifying businesses, sole proprietors, nonprofits, and tribal businesses continue to pay their employees.
Through low-interest private loans that could be forgiven under certain circumstances, employers whose businesses were impacted by the pandemic could continue to pay rent, utilities, and meet their payroll obligations. In order to qualify for partial or total forgiveness, businesses had to maintain stable employee counts and wages.
Typically, any amount of a loan that is forgiven is taxable to the recipient as income for the purposes of federal income tax. Given the nature of this particular loan, however, it makes sense that loan forgiveness would not be taxable, and that is exactly what the federal government decided to do. Section 1106(i) of the CARES Act specifically excludes portions of PPP loans that were forgiven from being considered federal gross income. Accordingly, they are excluded from federal income tax. However, state rules vary, and PPP loan forgiveness may be taxable under the law of some states. Check with your tax preparer to understand the impact of PPP loan forgiveness on your state income tax.
One more caution: the IRS has indicated that recipients of PPP loans of more than $2 million will be audited. Even those with loan amounts below that threshold are at an increased risk of audits. Be sure that the amounts listed on your tax return are consistent with the PPP amounts and forgiveness you received. Any inconsistencies increase the likelihood that you will be audited.
Small businesses are the backbone of the American economy. The SBA’s Economic Injury Disaster Loan (EIDL) and advance program was designed to help small businesses which have been particularly hard hit by the COVID-19 pandemic. The EIDL program makes capital more available to small businesses on terms that are friendly to borrowers.
The COVID-19 EIDL, unlike previous SBA EIDLs, offered qualifying small businesses an advance of up to $10,000. COVID-19 Economic Injury Disaster Loans, Targeted EIDL Advances, and Supplemental Targeted Advances may all be applied for through December 31, 2021. All of these funds were intended to cover operating expenses or to be used as working capital for affected businesses. While EIDL funds, like most loan funds, must be repaid, EIDL Advances are grants that do not require repayment.
As with the proceeds of any other business loans, funds from an EIDL are not considered taxable business income on your federal income tax return. In addition, if your business had expenses for which you used EIDL funds, you can deduct those expenses on your taxes, further reducing your business’s tax liability.
EIDL Advances, being grants, were initially intended to be treated as taxable income. The Consolidated Appropriations Act reversed that decision, and EIDL Advance funds are no longer to be reported on a tax return as taxable business income. As with loan proceeds from an EIDL, EIDL Advances can be used on deductible business expenses to lower your small business’s income taxes.
Businesses with 500 or fewer employees that were required by the government to suspend operations due to COVID-19, or that suffered a gross decline of at least 50% in receipts in a quarter of 2020 from the same quarter in 2019, qualified for the employee retention credit. Qualifying businesses received a maximum credit of $5,000 per quarter for each employee (up to 50% of eligible wages paid) in 2020. The federal government extended this credit through 2021, with a maximum credit of $7,000 per quarter per employee (up to 70% of eligible wages paid). The Employee Retention Credit can be claimed on quarterly tax returns rather than on the annual income tax return.
Coronavirus tax relief, while needed, may complicate your income tax filing. Given the increased risk of audit for some COVID-19 relief recipients, it is more important than ever to have competent tax guidance, so schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.