Small business owners across the country had high levels of uncertainty about their business’s future when the coronavirus pandemic began. Luckily, the CARES Act provided some small business financing options, which included the Paycheck Protection Program (PPP). With potentially 100% of the loan qualifying for PPP loan forgiveness, unlike EIDL loans, many business owners took advantage of it to save their company. The PPP also offers the benefit of deferring 50% of its 2020 payroll taxes to 2021. If you took advantage of the COVID relief offered by the Paycheck Protection Program, here’s what you need to know about how your 2020 business taxes will be impacted.
Funds From PPP Loans Won’t Be Taxed
The good news for small business owners is they won’t have to pay any PPP taxes since the money will not be considered taxable income. However, to avoid any potential issues or complications, it’s important to be conscious about only using the PPP funds on qualifying business expenses like rent, payroll, mortgage interest, and other approved expenses. So you won’t have to worry about paying significant small business taxes on PPP funds if you use them how they are intended.
Tax Deductions Can’t Be Applied If PPP Funds Are Used For Expenses
Some of the best small business tax help comes in the form of tax deductions claimed. Small business owners get tax breaks when paying rent, mortgage interest, utility bills, payroll taxes, and many other business expenses. However, as a trade-off for not having to pay income tax on your PPP loan, you can’t deduct those items as you normally would if you used PPP funds to pay for them. Even if you decide to defer 50% of your payroll taxes to 2021 as is allowed in the PPP, you still won’t be able to deduct that portion.
Always Stay Informed On PPP Policy Changes
One of the biggest reasons why the Paycheck Protection Program was so successful is because of the PPP loan forgiveness. On the other side, a significant downfall is not being able to take advantage of tax deductions you’re used to taking annually. There’s no doubt the PPP saved thousands of small businesses, so depending on how the next several months go, changes to the PPP are possible. Always stay informed on any policy changes, including whether tax deductions become possible in the future, so that you can take advantage of any benefits for your small business.
Tax Resource Group is here to help small business owners make sense of the Paycheck Protection Program, so there are no immediate or future surprises. This has been an unprecedented year with many changes no one expected, and we can help you walk through them all, so you come out with the best tax situation possible. If you have any questions or concerns about your small business taxes, don’t hesitate to contact us at any time to schedule an appointment with one of our professionals.