Tax ramifications of PPP loans clarified in new congressional act
Rules are not as complex now that Congress passed a law in December that clarified interpretations on PPP loans
The program designed to provide financial relief to businesses during the pandemic caused confusion for many businesses during 2020. The Paycheck Protection Program (PPP), part of the CARES Act, is complex and the related tax ramifications were not initially clear. On Dec. 28, 2020, Congress passed the Consolidate Appropriations Act, 2021, which clarified the tax ramifications of PPP loans.
However, it is extremely important for businesses to enlist the help of a professional — a certified public accountant (CPA) and/or tax attorney — to assist with any tax related issues that may arise from obtaining any PPP funds, or if a business is considering applying for PPP funds.
Conduct Due Diligence
Although CPAs are an asset to any small business, owners can conduct due diligence and prepare ahead of time for a meeting with a professional advisor. By researching information ahead of time, businesses may save time and also have a more comprehensive understanding of potential pitfalls and benefits from receiving the PPP funds.
When it comes to research, there is a great deal of information available on the Internet, but it is important to utilize bonafide resources to obtain the right information necessary to handle tax season this year. Here is a short list of resources and some details that can be used to start any due diligence on tax planning.
First and foremost, go directly to the source — the IRS. On IRS.gov, there is an enormous amount of information on PPP.
Other valuable resources are SBA.gov and the USChamber.com. Additionally, the U.S. Treasury Department may also provide businesses with additional information and helpful hints to review with a tax professional.
In November, 2020, the IRS provided a press release that was somewhat confusing as it related to tax consequences for businesses who obtained PPP loans, but with Congress passing the Consolidated Appropriations Act, 2021 businesses have a clearer picture of the tax ramifications: PPP loans that are forgiven are not taxable and taxpayers may deduct any expenses associated with the loan. When filing taxes, businesses should verify this information with a tax professional to ensure that this ruling applies to its organization.
After reading a plethora of online resources from various websites, one question remains prominently in the forefront: Will small business owners face tax ramifications due to receiving PPP funds? The answer was not as cut and dry as one would expect — at least in early December.
Initial reports leading up to the new act passed in Dec. indicated in some cases taxes would have to be paid on the money received, yet in other cases it depended on how the PPP funds were spent. The new law that Congress is expected to pass hopes to eliminate the confusion and helps to clarify the specifics. Yet, information is in constant flux and exasperating the challenge is that the PPP guidance has been modified several times since its inception.
The complexity of the PPP program is why it is so important to connect with an accountant, sooner rather than later, to identify how to prepare 2020 tax returns. Each business should know the amount of money received from PPP loans, what the funds were used for — detail exact spending in all expense categories — and prepare this documentation ahead of meeting with the accountant.
Additionally, if a business applied for loan forgiveness, this information is critical to share with any tax professional. If business owners are unsure if it applied for loan forgiveness, discuss the topic with the tax professional.
PPP Loan Forgiveness Information
For additional information on how, or why, to apply for PPP loan forgiveness, SBA.gov has more information for review. Just note, there are some deadlines in which businesses can apply for the loans.
The SBA website outlined specific aspects of PPP in two separate documents, one was issued in August of 2020, the other issued in December. SBA also provided small business guidance and loan information on its website. The application on PPP Loan Forgiveness is also available on SBA.gov.
For a more in-depth read on this topic, check out the Bloomberg article IRS Blesses Tax Breaks on Forgiven PPP Loans After Law Change.
PPP loans are complex and it is important to turn to a professional to discuss any related positive or negative tax implications or any possible loans businesses may apply to for assistance during the pandemic.
*DISCLAIMER: This article is not intended to be relied upon as tax advice. See your tax professional for additional information on how these regulations impact your business.