Received a PPP Loan? Here’s What You Need to Know About Deductions

The Paycheck Protection Program (PPP), assisting small business owners affected by the coronavirus pandemic, has faced unprecedented demand. According to Forbes, technical shortfalls and unclear guidelines have created difficulties for businesses, in dire need of support, to access funds.

For businesses that received PPP assistance when they needed it, loan forgiveness is paramount. Businesses are not taxed on the proceeds of a forgiven PPP loan. A forgiven PPP does not involve any payment from tax payers or businesses that have received it

PPP Loan forgiveness, deductible expenses and Employee Retention Credit

The Second Draw PPP loans made it possible for borrowers to earn full loan forgiveness if they maintain employee wages. They could also spend the money received (at least 60% of the proceeds) on payroll costs and other eligible non-payroll costs, including business mortgage interest payments, business utility payments, and business rent payments.

IRS guidelines state that eligible employers can claim Employee Retention Credit (ERC) even after receiving a Small Business Interruption Loan under the PPP. In obtaining loan forgiveness, ERC can be claimed by employers on qualified wages that are not counted as payroll costs. Any wages eligible for ERC or PPP forgiveness can be applied to either of these two programs but not both. Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible.

What happens if you have not received PPP forgiveness?

If forgiveness of a PPP loan was unexpectedly rejected, businesses that applied for forgiveness will be able to deduct the expenses as per the IRS.  For businesses that have not been able to meet the eligibility criteria, employers can still claim the ERC on any qualified wages not counted as payroll costs. If wages paid in either the 2nd or 3rd quarter of the year, or both, have been included in the application, but forgiveness was not granted, the employer can claim ERC related to those wages paid.

The ERC can be claimed on the 4^th quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return, according to IRS guidelines. The same form can be used to claim any ERC attributable to health expenses. The expenses must be qualified wages that were not included in the 2^nd or 3^rd quarter Form 941. Businesses short on time can choose to file an adjusted return or claim for refund using Form 941-X.

Meeting tax obligations

The intricacies of business taxation and PPP loan forgiveness can be navigated and resolved with expert guidance from tax professionals. A startup or small business may not have time to research amendments and modifications to tax laws. Even bookkeeping and CPA firms that understand the latest in business tax laws may be unable to devote the time required to analyze tax implications. Tax services professionals are well-versed in the technicalities surrounding deductions and criteria for eligibility. Optimizing tax planning can help businesses save money without compromising on tax compliance.

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