More than five million small businesses have been approved for and received Paycheck Protection Program (PPP) loans in 2020, totaling more than $525B. These loans are intended to keep employees on payroll and small businesses in operation throughout the coronavirus pandemic. For many business owners, the ability to have their loan forgiven, in whole or in part, is the biggest draw.
The PPP launched in April 2020 and disbursed $350B in just two weeks. Later, Congress allocated an additional $310B for a second round of PPP funding and extended the loan application deadline. In June 2020, the PPP Flexibility Act was signed into law. This increased the loan forgiveness covered period, reduced the percentage of funds required to be spent on eligible payroll costs, and extended the loan repayment term.
Congress recently passed The Coronavirus Response and Relief Supplemental Appropriations Act of 2021, a $900 billion COVID relief package to deliver the second round of economic stimulus for individuals, families, and businesses. The Act was signed into law on December 27, 2020. The relief package includes an additional $284.45 billion in funding for first-time and second draw PPP loans to help small businesses.
As tax season looms, PPP loan recipients may be wondering what they need to do to prepare.
1. Use all PPP funds and prepare for loan forgiveness
Your loan forgiveness covered period begins on the date you receive your loan proceeds and ends on a date chosen by the borrower between 8 and 24 weeks later. You don’t have to use all your loan proceeds during the loan forgiveness covered period, but only certain costs paid during that period or incurred during that period and paid before the first regular payroll date, billing date, or health insurance premium due date (as applicable) after that period, are eligible for forgiveness. Costs incurred after the loan forgiveness covered period won’t be forgiven.
Note that although you do not need to submit your forgiveness application until the maturity date of your loan, interest is accruing and you will be required to start making loan payments at the end of your Deferment Period.1 If you haven’t already, it’s a good idea to organize your payroll in preparation for forgiveness. Applying for forgiveness and preparing payroll documents for your lender is easier when your payroll is organized and accurate.
Finally, depending on the size of your loan, the U.S. Small Business Administration (SBA) may require additional paperwork. For example, if you received PPP loans totaling $2M or more together with affiliates, the SBA may require you to fill out the loan necessity questionnaire.
If you’re unsure about your loan forgiveness covered period, your forgiveness status, or anything else pertaining to your PPP loan, work directly with your lender.
2. Understand how PPP funds could impact your taxes
The Economic Aid Act includes a few highly anticipated benefits for small businesses, including reversing the IRS’s prior guidance concerning tax deductions and PPP loans.
The IRS originally stated that borrowers whose PPP loans are forgiven would not be able to deduct expenses paid with the proceeds of a PPP loan. This position has been reversed. As a result, PPP borrowers will be able to claim deductions in 2020 and 2021 for any expenses that are otherwise deductible, regardless of whether PPP proceeds were used to pay those expenses.
It’s always a good idea to work with a tax expert if you have questions about tax deductions and PPP loans.
3. Work with an expert
A number of things can impact small business taxes this year, such as Economic Injury Disaster Loans (EIDL) or Employee Retention Credits (ERC). If you received an EIDL advance, you may need to include it in your taxable income. On the other hand, ERCs may reduce your taxes, but must be claimed using form 941.
Small business taxes are complex even in the best of times. It’s always a good idea to work with a tax specialist to ensure you’re maximizing your tax credits and deductions. This year, experts have two words of advice: Get help! Work with your accountant or tax advisor to navigate tax complexities and file your taxes with confidence.
In the meantime, keep an ear to the ground as lawmakers consider PPP and tax updates. Finally, be sure you’re keeping organized records of your business expenses so you can move quickly when decisions are made.
1If you apply for forgiveness, your deferment period ends when the SBA remits forgiveness to your lender or notifies your lender that you are not eligible for forgiveness. If you do not apply for forgiveness within 10 months from the end of the maximum 24-week forgiveness covered period, your Deferment Period ends on the date that is 10 months after the last day of the maximum 24-week forgiveness covered period. If you do not apply for forgiveness or do not receive full forgiveness of your loan, you will need to pay back unforgiven loan amounts. This is based on the terms of the loan agreement with your lender. For more information about PPP loan forgiveness, please refer to our Loan Forgiveness article.
Regulations and guidance from the SBA and the U.S. Department of Treasury evolve rapidly, and the information contained herein may be outdated. Please refer to the latest guidance from the SBA and the Treasury to confirm current program rules.
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