person doing tax calculations
The most recent stimulus bill makes changes to how PPP loans are taxed and how expenses paid for with PPP loans are treated for tax purposes. — Getty Images/Drazen Zigic

As of 5/5/21 the PPP loan program has run out of funds and is no longer accepting applications. Some community lending institutions are still accepting applications from minority-owned and women-owned businesses and businesses in underserved communities to continue to disseminate funding earmarked for that purpose. For more on stimulus aid still available, see our main story here.


One of the most considerable ways the U.S. government has provided aid to small businesses during the COVID-19 pandemic has been through Paycheck Protection Program (PPP) loans. More than $500 billion in these loans were distributed in 2020 alone, making PPP an enormously popular choice for small businesses hoping to recover.

While the PPP has been helpful for businesses, the tax implications associated with these loans have proved to be confusing for many business owners. After the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020, the Small Business Administration (SBA) issued guidance that changed several times. Then the rules around PPP and taxes changed again in December 2020 with the passage of the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) of 2021.

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 hundreds of billions in forgivable loans to small businesses. The program initially had $350 billion allocated in March and another $320 billion authorized in April after initial funding was exhausted. In December 2020, Congress provided another $284 billion for new and “second-draw” PPP loans for businesses. These loans are issued by private lenders and backed by the SBA. The primary purpose of PPP is to keep workers on payroll and fill in gaps regarding rent, utilities, mortgage interest, supplier costs, personal protective equipment and related expenses.

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 expenses, including mortgage interest or rent obligations; utility costs; operations costs such as business and accounting software; uninsured property damage from civil unrest; supplier costs on essential goods; and worker protection expenditures such as personal protective equipment (PPE).

Forgiveness is based on employers continuing to pay employees at normal levels for a period between eight and 24 weeks following the loan’s origination. The Treasury Department released multiple PPP Loan Forgiveness Applications, which must be filled out by businesses seeking forgiveness and then submitted to the private lender from which they obtained the loan. All companies that have accepted a PPP loan or are considering a PPP loan should closely examine the application to make sure they are compliant.

Does a forgiven PPP loan become taxable income?

After the passage of the CRRSAA into law in December 2020, Congress made clear that a forgiven PPP loan is completely tax-exempt and is not taxable income.

As of December 2020, businesses now have the opportunity to take out a PPP loan and obtain the Employee Retention Tax Credit (ERTC) for both 2020 and 2021.

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

Yes. While the IRS and Treasury Department originally said otherwise, the CRRSAA in December 2020 changed these provisions so business expenses paid for with PPP funds can be written off like everyday business expenses. The decision was effectively reversed because some businesses may have had 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)?

Yes. As of December 2020, businesses now have the opportunity to take out a PPP loan and obtain the Employee Retention Tax Credit (ERTC) for both 2020 and 2021. For example, if a business took out a PPP loan at any point in 2020, they could now apply the ERTC for their 2020 taxes as long as PPP and ERTC don’t cover the same payroll expenses. Additionally, the ERTC was drastically expanded to help businesses make it through the first half of 2021. The prior credit allowed for a maximum benefit of $5,000 per employee for all of 2020, while the new credit allows for a maximum of $14,000 per employee through June 30, 2021. The bill also expands eligibility for ERTC to include more businesses that had significant revenue reductions in 2020.

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 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 loans be used to pay business taxes?

No, PPP loans can only be used to pay for specific outlined expenses (such as payroll, rent, mortgage interest, utilities, personal protective equipment, and business software), so taxes cannot be paid with PPP funds.

Where can I read more about the December 2020 changes to taxes and the PPP?

The U.S. Chamber has released an updated guide to Small Business COVID-19 Emergency Loans that further explains the substantial changes passed into law in December 2020.

For more information on the new stimulus package, watch our Small Business Update with U.S. Chamber of Commerce Chief Policy Officer Neil Bradley, which breaks down how the new legislation impacts PPP loans, taxes and more.

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

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Published December 28, 2020