Small businesses in many industries have been adversely affected by the ongoing COVID-19 pandemic. Paycheck Protection Program (PPP) loans created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, and extended in late December, offered a much-needed lifeline for small business owners. However, entrepreneurs who take advantage of PPP loans and other coronavirus-related relief should take note of certain implications for small business taxes.
While specific tax consequences will vary somewhat from one business to another, some provisions apply broadly to businesses of all types and sizes, as discussed in more detail below.
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Can I deduct expenses that I paid for with a PPP loan?
Businesses that took advantage of forgivable PPP loans under the original rules did not need to report the funds as income for tax purposes. However, those original CARES Act rules were silent regarding whether or not business owners could deduct ordinary and necessary business expenses when those expenses were paid using PPP loan proceeds. The IRS interpreted the legislative gap as prohibiting such tax deductions.
Fortunately, the Consolidated Appropriations Act, signed into law on December 27, 2020, settled the issue by specifically stating that small businesses may now deduct expenses that were paid for using forgiven PPP loans, as long as the expenses were for items that would otherwise be tax deductible. The legislation did not change the income tax-exempt nature of forgiven PPP-loan proceeds.
What other tax relief is available for PPP loan recipients?
There are several parts of the new legislation that could impact those who previously received a PPP loan, as well as potential future recipients.
First, eligible business owners can now apply for another round of PPP loans. Under the Consolidated Appropriations Act, PPP loan eligibility was expanded to include groups not previously eligible for loans, such as Section 501(c)(6) nonprofit organizations (churches, local newspapers, media outlets, etc.). In addition, small businesses with fewer than 300 employees who have documentation that their revenues are down by at least 25% will be eligible for a second PPP loan of up to $2 million.
The new legislation also clarified that the income tax basis for the borrower’s assets would not be reduced due to PPP loan forgiveness. Also, for business owners who received Economic Injury Disaster Loan (EIDL) advances, the advance amounts do not need to be deducted from the PPP loan forgiveness amount.
Are there other COVID-related relief measures related to small business taxes that I should be aware of?
The Consolidated Appropriations Act included several other provisions that will likely impact many small business owners.
Employee Retention Tax Credit (ERTC) Changes
The ERTC, available to certain businesses with fewer than 500 employees, has now been extended through June 30, 2021. In addition, the Consolidated Appropriations Act expanded the credit rate, increased the limit on wages, and expanded eligibility requirements, including allowing new employers to claim the credit—even those that weren’t in business for all or part of 2019.
PPP and ERTC Claims
Another major change in the Consolidated Appropriations Act is the removal of the original CARES Act provision barring employers who received PPP loans from claiming the ERTC. The December 2020 legislation removed this provision of the CARES Act retroactively. This means PPP-loan recipients may claim the ERTC, as long as the PPP loan proceeds and ERTC do not cover the same payroll expenses. (Note: As of the date of this article, the IRS website has not yet been updated to reflect this legislative change.)
Payroll Tax Deferral – Repayment Extension
Employees whose employers withheld the employee portion of Social Security taxes from pre-tax wages between September 1 and December 31, 2020 may also benefit from changes in the Consolidated Appropriations Act. Those employers may now take advantage of an extended repayment period, increasing withholding ratably for employees’ wages paid through December 31, 2021, rather than the original date of April 30, 2021.
Will there be additional tax relief in 2021 for small businesses?
The provisions of the Consolidated Appropriations Act extended certain small business tax benefits into 2021, as explained more fully above.
Although nobody can say for certain what Congress will do in 2021 or beyond, lawmakers on both sides of the aisle have indicated a commitment to stimulating the economy and helping small businesses survive the ongoing pandemic.
Is your small business taking full advantage of pandemic-related tax relief?
Managing small business tax requirements in a “normal” year can be stressful. The COVID-19 pandemic and related legislation offer valuable financial relief for struggling business owners, but they also can also complicate the process for some business owners.
No matter what products your business makes or sells, or what services you provide, you need to stay on top of your tax obligations. Ask a lawyer or seek help from a qualified tax professional if you have any questions about the federal or state tax requirements that apply to your business, or about how the CARES Act and the Consolidated Appropriations Act may impact you and your company.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.