One of the biggest initiatives to support businesses through the COVID-19 pandemic is the Paycheck Protection Program (PPP). The PPP was designed to help businesses keep staff on payroll by providing a loan to fund payroll costs as well as limited other business expenses.
While a loan is helpful during these uncertain times, one of the major draws of this program is that the loan can be forgiven if a business meets certain criteria.
For months there was a question as to the tax implications of the forgiven loan. At the end of 2020, tax treatment questions were definitively answered for federal taxes.
Is a Forgiven PPP Loan Taxable?
Under normal circumstances, a forgiven loan is generally considered a taxable event for federal income taxes. This isn’t the case for PPP loans. Forgiven loan amounts are not subject to federal taxes. The entire forgiven loan balance is tax-exempt and is not considered taxable income.
Are PPP Expenses Tax Deductible?
When the PPP was created, the deductibility of expenses paid with PPP funds was in question. Thanks to the passage of the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) of 2021, eligible deductible expenses were expanded. While at least 60% of the loan must be spent on payroll, up to 40% can be used on other eligible expenses.
In addition to payroll, those other expenses include:
- Operations expenses
- Supplier costs
- Worker protection expenses
- Covered property damage costs
- Mortgage interest
- Rent and Utilities
Can PPP Recipients Also Obtain the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) was originally not widely used because businesses couldn’t use both PPP loans and the ERTC.
The CRRSAA changed this, and now employers who have used PPP funds (in the first and/or second draw) can also qualify for the ERTC. One important thing to note is that the PPP funds and ERTC can’t be used to cover the same payroll costs.
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