What you’ll discover:
Can I deduct expenditures incurred as a result of a PPP loan?
What additional tax breaks are there for PPP loan recipients?
Are there any additional COVID-related tax relief options for small businesses that I should be aware of?
Will there be greater tax reduction for small firms in 2021?
Is your small company making the most of pandemic-related tax breaks?
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.
Table of Contents
Can I deduct expenditures incurred as a result of a PPP loan?
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.
What additional tax breaks are there for PPP loan recipients?
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.
Are there any additional COVID-related tax relief options for small businesses that I should be aware of?
Many additional measures in the Consolidated Appropriations Act are expected to affect many small company owners.
Modifications to the Employee Retention Tax Credit (ERTC)
The ERTC, which is only accessible to enterprises with less than 500 workers, has now been extended until June 30, 2021. Moreover, the Consolidated Appropriations Act enhanced the credit rate, salary cap, and eligibility restrictions, including permitting new companies to claim the credit—even if they were not in operation for all or part of 2019.
Claims for PPP and ERTC
Another significant change in the Consolidated Appropriations Act is the elimination of the original CARES Act clause that prohibited employers that obtained PPP loans from claiming the ERTC. This section of the CARES Act was repealed retroactively in the December 2020 legislation. This implies that PPP loan beneficiaries are eligible for the ERTC as long as the PPP loan revenues and the ERTC do not cover the same payroll expenditures. (Please note that the IRS website has not yet been changed to reflect this legislation change as of the date of this post.)
Deferred Payroll Tax — Repayment Extension
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.
Will there be greater tax reduction for small firms in 2021?
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.
Is your small company making the most of pandemic-related tax breaks?
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.