person doing tax calculations
A forgiven PPP loan is tax-exempt. However, using the loan can also reduce how much you can write off on your business taxes. — Getty Images/Drazen Zigic

One of the largest ways the U.S. government has attempted to aid small businesses during the COVID-19 pandemic has been through Paycheck Protection Program (PPP) loans. More than $500 billion has been distributed through mid-July 2020 across five million loans, making PPP an enormously popular choice for small businesses hoping to recover this year.

While the PPP program has been helpful for businesses, the tax implications associated with them have proved to be a little confusing. As the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other coronavirus-related legislation were passed through Congress and signed into law quickly, the Small Business Administration (SBA) has tried to keep up by providing guidance. However, this guidance has been modified multiple times since PPP was passed and it can be challenging to keep up with the changes.

Here are some commonly asked questions about loan forgiveness and tax obligations related to PPP for small business owners.

How does the PPP loan program work?

The PPP emergency loan program, part of the CARES Act, has been authorized to distribute more than $600 billion in forgivable loans for small businesses. The program originally had $350 billion allocated in March, and another $320 billion was authorized by Congress in April after the initial funding was exhausted. The PPP’s deadline for applications was later extended one final time to ensure all businesses who wanted could apply for the loans. These loans are issued by private lenders and backed by the SBA. The basic purpose of the PPP is to keep workers on payroll, rehire laid-off workers, and fill in gaps regarding rent, utilities, and related expenditures.

How can I get my PPP loan forgiven?

A PPP loan can be forgiven as long as at least 60% has been spent on employee payroll costs. The other 40% of funds are allowed to be used for mortgage interest, rent and utility payments. Forgiveness is based on employers continuing to pay employees at normal levels during 24 weeks following the origination of the loan. The Treasury Department has a PPP Loan Forgiveness Application, which must be filled out by businesses seeking forgiveness and then submitted to the private lender they obtained the loan from. All businesses that have accepted a PPP loan or are considering a PPP loan should closely look over the application to make sure they are compliant.

Does a forgiven PPP loan become taxable income?

A forgiven PPP loan is tax-exempt. However, using the loan can also reduce how much you can write off on your business taxes, so keep that in mind when applying for the loan. Usually, expenses like payroll, rent and utilities are deductible from your normal taxable income, and it means you owe less tax at the end of the year. Without the deduction, your business may owe more taxes than it normally pays.

The PPP Flexibility Act, which was enacted on June 5, 2020, changed the rules so employers can still defer these taxes even after a PPP loan is forgiven.

Can I write off payroll, rent and utilities as business expenses if I used a PPP loan to pay for them?

No. As mentioned above, you can not write off these types of expenses if they were paid for with PPP loan funds. The Treasury Department has clearly stated it will not allow for “double-dipping.” A forgiven PPP loan is effectively an untaxed grant and, as such, the IRS wants to prevent employers from receiving a “double tax benefit.” This does mean that some businesses may have higher taxable revenue in 2020 due to not being able to write off as many expenses.

Can I get a PPP loan and take advantage of Employee Retention Tax Credit (ERTC)?

No, businesses were not allowed to take both a PPP loan and obtain the ERTC. The intention here was to allow businesses to use one or the other to provide quick financial relief.

Will taking out a PPP loan interfere with my business getting family and sick leave tax credits outlined by the Families First Coronavirus Response Act (FFCRA)?

No, businesses can still take advantage of new tax credits from FFCRA while also getting and using a PPP loan. However, businesses are not permitted to use PPP loan funds to pay for sick and family leave wages if the business is expected to get a tax credit for that leave.

Can I defer payroll taxes while also getting a PPP loan?

Yes, employers are allowed to defer payroll taxes (as specified in the CARES Act) from March 27, 2020, through December 31, 2020. The PPP Flexibility Act, which was enacted on June 5, 2020, changed the rules so employers can still defer these taxes even after a PPP loan is forgiven. Fifty percent of the deferred taxes that accumulated in 2020 must be paid by December 31, 2021, and 50% of the deferred amount must be paid by December 31, 2022.

Can PPP be used to pay business taxes?

No, PPP loans can only be used to pay for specific expenses (payroll, rent, mortgage interest or utilities), so taxes cannot be paid with PPP funds.

For more resources from the U.S. Chamber of Commerce:

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Published May 21, 2020