The Paycheck Protection Plan (PPP) was a loan from the SBA, administered by banks, financial institutions and fintechs for businesses impacted by the Coronavirus pandemic in the US. If you spent the money in accordance with the PPP guidelines, the money would be forgiven as a grant.
There were other details that changed over time, such as what percentage of the money needed to be spent for payroll in order to get the forgiveness.
As of December 2020, the form requires that you state that the dollar amount was used only for payroll costs to retain employees, business mortgage interest payments, business rent and business utility payments.
You may need to reduce some of the forgiveness amount if you have fewer full-time equivalent employees and/or there are salary or hourly reductions. There are some exemptions to that rule. Check the instructions of the form.
The payroll costs have to be equal to at least 60% of total expenses. If they aren’t, the loan forgiveness will be less.
There are two possible covered periods to use for the loan forgiveness calculation: the 8 week period and the 24 week period.
If you are using a 24-week cover period, the payroll amount for an owner cannot exceed 2.5 months’ worth of 2019 compensation for any owner/employee or self-employed individual/general partner. The amount is capped at $20,833 per individual owner. If you are using an 8-week Covered Period, the payroll amount for an owner can not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner. It is capped at $15,385 per individual.
Congress and IRS Disagree on PPP Loan and Taxes
Congress said that the money your small business received first as a loan and then as a forgivable grant would not be taxable.
The IRS and the Treasury then said that was fine, BUT you had to then deduct the amount you received from your deductions. In effect, the forgivable grant just became taxable. It didn’t increase income, but it did decrease deductions.
Now, the Treasury and IRS have double downed. In November 2020, they said that business owners who “reasonably believe” their PPP will eventually be forgiven can’t deduct the costs in 2020.
So even if you STILL have a loan in 2020, you can’t take the deduction.
That’s the really long answer to a question I received this past week.
“Should we file for PPP loan forgiveness in 2020 or wait for 2021?”
I thought initially it was better to wait because Congress has repeatedly said they would address this issue. They intended that the PPP loan/grant would be tax exempt. But the IRS and Treasury danced around the rules.
Now with this new additional ruling, we’re left hoping Congress does something. In these last few days, with other things on their minds, it’s unlikely that they will.
For that reason, there is no reason to wait to file for forgiveness. You will in essence have taxable income whether you file or not.
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