Will You be Taxed for Your Forgiven PPP Loan?

I think we all went through 2020 under the assumption that our 2020 taxes were going to look different than previous years. These past 12-months have brought a few new programs created by the SBA to help out small businesses. But what does this mean for your 2020 taxes?

PPP Loan Background

The Paycheck Protection Program (PPP) is a true lifeline for business owners that are struggling due to COVID. The PPP is a “loan” intended to provide cash flow assistance for between eight and twenty-four weeks.

What makes the PPP even more enticing is the possibility that the loan can be forgiven, as long the money was spent on the proper categories.

On December 22nd, 2020 President Trump has passed legislation on the Consolidated Appropriations Act, that will deliver new stimulus impacting families and businesses, while also clarifying some of the tax drama that small businesses have been dealing with.

But with this new program came questions about how the IRS will view the money. And more importantly, whether or not you will be taxed on those monies.

Will I be taxed for my forgiven PPP loan?

The first round of funding originally spelled out that the expenses used in the forgiven portion of your PPP loan would not be eligible to be deducted on your taxes. This created a lot of backlash from small business owners who received the PPP, as the goal was not to create a tax burden for those receiving the funds.

After the second round of the PPP was passed, the tax rules were changed. The expenses related to PPP loans are now fully deductible! If you were a business that applied for the forgiveness before round two was passed, we are not sure how some of the ancillary amendments will be dealt with and whether they will be retroactively supported - something we are still waiting on guidance for. 

What does this look like on my tax return?

When looking at your tax return with the PPP there will be no disclosure. The expenses are fully deductible and the loan may be forgiven. The income on financial books from tax returns will be implemented by an M1 adjustment. 

Now, if you did not use the monies for the intended purpose - which isn’t always a bad thing if you were using it to clean up your balance sheet - then you may not get the PPP forgiven, and therefore will be left with a loan on your balance sheet.