What you’ll discover:
The continuing COVID-19 epidemic has had a negative impact on small firms in a variety of sectors. Paycheck Protection Program (PPP) loans, established by the Coronavirus Assistance, Relief, and Economic Security (CARES) Act of 2020 and extended in late December, provided a vital lifeline for small company owners. Nonetheless, entrepreneurs that use PPP loans and other coronavirus-related assistance should be aware of certain tax consequences for small businesses.
Although exact tax effects may differ from one firm to the next, several laws apply widely to all kinds and sizes of enterprises, as detailed in more detail below.
Companies who used forgiving PPP loans under the original guidelines did not have to disclose the cash as income to the IRS. The original CARES Act provisions, however, were vague on whether or not company owners may deduct ordinary and necessary business costs paid using PPP loan proceeds. The IRS understood the legislative gap to mean that such tax deductions were illegal.
Thankfully, the Consolidated Appropriations Act, which was signed into law on December 27, 2020, clearly stated that small firms may now deduct costs paid for with forgiven PPP loans, as long as the payments were for products that would normally be tax deductible. The Act made no changes to the tax-free status of forgiven PPP loan proceeds.
Many provisions of the new law may have an influence on persons who have already received a PPP loan, as well as possible future borrowers.
First and foremost, qualifying company owners may now apply for a new round of PPP loans. With the Consolidated Appropriations Act, PPP loan eligibility was broadened to include entities not previously eligible for loans, such as Section 501(c)(6) nonprofit organizations (churches, local newspapers, media outlets, etc.). Moreover, small enterprises with less than 300 workers that can demonstrate a 25% decrease in income will be eligible for a second PPP loan of up to $2 million.
The new regulation also stated that the borrower’s assets’ income tax base would not be decreased as a result of PPP debt forgiveness. Also, company owners who obtained Economic Injury Disaster Loan (EIDL) advances do not have to subtract the advance amounts from the PPP loan forgiveness amount.
Workers whose employers withheld the employee part of Social Security taxes from pre-tax pay between September 1 and December 31, 2020, may benefit from changes in the Consolidated Appropriations Act as well. Some companies may now take advantage of a longer payback term, raising withholding ratably for workers’ earnings earned until December 31, 2021, rather than the original April 30, 2021 deadline.
As previously noted, the Consolidated Appropriations Act extended several small company tax breaks beyond 2021.
While no one can predict what Congress will do in 2021 or beyond, politicians on both sides of the aisle have expressed a desire to stimulate the economy and assist small companies in surviving the continuing epidemic.
In a “typical” year, managing small company tax responsibilities may be burdensome. The COVID-19 pandemic and associated laws provide essential financial aid to struggling company owners, but they may also make the process more difficult for individuals.
Whatever items or services your company produces or sells, or what services it offers, you must meet your tax requirements. If you have any concerns regarding the federal or state tax regulations that apply to your business, or how the CARES Act and the Consolidated Appropriations Act may affect you and your firm, consult a lawyer or a competent tax practitioner.