For all small business owners, the Coronavirus pandemic has hit hard. Now that tax season is right around the corner; you might have a flurry of questions about your PPP loan and what PPP taxes you are obligated to pay.
This is probably especially true because the “rules” have been changed multiple times for the Covid-19 relief packages.
If you aren’t sure you know what kinds of PPP tax implications or PPP tax deductions you will have for your small business this year, we are here to clear things up.
Business Owners Are Concerned About Tax Implications from PPP Loans
The big question on every small business owner’s mind: Is PPP taxable? A crucial piece of information to know is that there are ways to avoid paying taxes on your small business’s PPP loan. The best way to avoid being taxed is to obtain PPP loan forgiveness, which means spending your loan funds on pre-approved expenses.
Can You Deduct Expenses Paid with Funds from Your PPP Loan?
The short answer is, yes, you can deduct expenses paid with funds from a PPP loan. Business expenses are deductible, just like they would normally be, when obtained with loan funds.
What this means for tax filing is that your loan won't bring up expenses or tax fees in your standard filing. However, state tax deductions may vary because federal and state laws diverge. Consulting a local tax pro is an excellent way to address your location-specific needs.
Self-Employed Tax Deductions
Because sole proprietors, independent contractors, and self-employed folks are eligible for PPP, a relevant question is, is PPP taxable income for self-employed people? The answer is somewhat complicated, because it depends on whether you apply for and receive loan forgiveness.
If you receive loan forgiveness, that converts the loan into a tax-free grant (much like the EIDL Advance program). This means you don't owe tax on any forgiven amount of the loan.
A related question is, is PPP taxable income for employees? According to the SBA, the answer is yes; employees receive their standard paychecks with federal taxes withheld as usual. For the employer's side, however, the payroll cost is counted as the full amount, pre-tax.
Tax Breaks for Getting a PPP Loan
When it comes to PPP tax, there are a lot of questions on small business owner’s minds. Are there tax breaks for PPP loans? Well, the bulk of this depends on what amount of your PPP loan is eligible for forgiveness.
You can apply for PPP loan forgiveness once you've spent all the funds from your loan. A handful of rules apply, but the primary qualifier is that you maintain employee and compensation levels, spend at least 60 percent of your proceeds on payroll expenses, and that your other purchases were also eligible expenses.
If you want to know more about what kinds of financial help you can get, you can find information about what types of SBA loans your small business qualifies for here.
Are Paycheck Protection Program Loans Taxable?
Not with loan forgiveness. Dealing with PPP loan expenses and worrying about PPP loan tax implications can be stressful, but the availability of loan forgiveness can ease some of those concerns.
If you still have questions, seek PPP loan forgiveness tax guidance to ensure you are getting the most out of the COVID relief bill.
PPP tax can be complicated to grasp. This tax season may feel a lot more complicated, much like the year as a whole. However, you can feel confident knowing that aid like the Covid-19 Relief Bill and the PPP Tax Deduction Bill is there to help your small business continue through these difficult times.
About the Author, Madison Taylor
Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates! Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.