If you’re like most small business owners wading your way through the EIDL and PPP loans and the regulations and requirements that go with them, welcome to the club. As we see more entrepreneurs receiving funds from these two SBA programs, we’re also seeing more questions about what comes next.
One big question? Whether or not the funds from these two loan programs will be taxed on a business’ annual income tax return. Whether you’ve got just one business or are applying for PPP with multiple businesses, you need to know what to expect down the road.
For many sole proprietors and other entrepreneurs, filing taxes for 2020 seems a far-off worry they don’t want to think about right now, but the truth is: knowing what to expect can help you plan ahead once we get back to the new normal.
Please note: The material contained in this article is for informational purposes only, is general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
Will the Federal Government’s EIDL or PPP Loans be Taxable?
Here’s some great news about federal government taxes if you receive the PPP loan: the forgivable portion of your loan isn’t considered taxable business income, and therefore, you won’t have to pay income tax on it.
This isn’t typical for the Internal Revenue Service: usually, anything beyond ordinary revenue, such as capital gains or dividends, is taxed. That also included forgiven debt which is normally taxed as “cancellation of debt” income. But the CARES Act specifically deems that the forgivable component of these loans isn’t included as part of your business’ gross revenue, so you don’t have to include it in your gross receipts.
While there hasn’t been guidance specifically for the $1,000 per person grant (up to $10,000) that you can receive as part of the Economic Injury Disaster Loan, (whether or not you get approved for the actual loan), we assume that, because it’s a grant and not a forgiven loan, that this amount would be taxed. Hopefully, we’ll soon see guidance published to clarify this.
That leaves the rest of the loan to contend with. For EIDL, everything beyond that grant of $1,000 per employee is a loan and must be repaid. If you aren’t eligible for loan forgiveness, you’ll have to pay back all or a portion of what you borrowed. Therefore, these loans will not be taxed, just like any other loan. Additionally, you may be eligible to take a qualified business income deduction for the interest paid on either the EIDL or PPP loans if you use them for eligible business expenses, though, again, we haven’t seen specific guidance on this.
Will States Tax the Federal Government’s COVID-19 Lifeline to Small Businesses?
Here’s where things get murky: while the federal government has vowed not to tax PPP and EIDL loans, we don’t have the guarantee that states won’t. The CARES Act doesn’t require states to follow suit in not charging taxes on these loans, though it is the hope that they will keep in line with federal regulations.
It’s expected that as we know more about the depth and breadth of COVID-19’s impact long-term on small businesses, each state’s department of revenue will publish guidance on taxes related to PPP and the EIDL grant, as well as tax credits and business income deductions that companies may qualify for.
Tax Changes from CARES ACT
In addition to offering the PPP and EIDL SBA COVID-19 relief loans, the CARES Act also has some updates to income tax laws and Internal Revenue Codes.
If you remember the Tax Cuts and Jobs Act (TCJA) from late 2017, you’ll remember that personal income tax got a bit easier to file, and the standard deduction was expanded. It also reduced the top corporate income tax rate on taxable business income.
While that TCJA Act is still in play, the CARES Act made a few tweaks to it, including delayed tax payments, relief from certain provisions, and a few technical corrections.
With regards to net operating losses: the TCJA stopped companies from being able to carry back losses to offset prior years’ taxes and limited the share of taxable income that could be offset by the NOL deduction.
The CARES Act now allows for a five-year carryback of net operating loss for 2018, 2019, and 2020 taxable years. If this applies to you, you can modify tax returns as far back as those from 2013 to leverage this updated guideline.
Also, the CARES Act states that NOLs incurred before January 1, 2021, can be used to fully offset income, whereas TCJA limited the amount to 80% of taxable income.
Another business income tax provision: companies with tax credit carryforwards and previous alternative minimum tax (AMT) liability can now claim larger refundable tax credits than they could prior to the CARES Act. And the net interest deduction limitation, which previously limited a business’ ability to deduct interest paid on tax returns to 30% of EBITDA, has been expanded to 50% of EBITDA for 2019 and 2020.
Another respite: you can defer the following payroll tax payments that are owed between March 27, 2020, and ending December 31, 2021:
- The employer portion of Social Security payroll tax payments
- The employer portion of FICA taxes
- The employer and employee representative portion of Railroad Retirement taxes
- Half of SECA tax liability
You’ll owe 50% of the amount due on December 31, 2021, and the other 50% due December 31, 2022.
There is also a payroll tax credit for employment taxes for certain eligible companies, including (but not limited to) businesses that had to close because of COVID-19. However, if you get your PPP loan forgiven, you won’t be eligible for the Employee Retention Tax Credit.
Nav’s Final Word: Are Paycheck Protection Program Loans Taxable Income?
It’s unfortunate that deciphering tax code as it relates to the Paycheck Protection Program and Economic Injury Disaster Loan program is so…taxing. The rules haven’t quite been firmed up, so Nav will keep you posted as we learn more about tax cuts and tax deductions related to PPP and EIDL.
In the meantime, get more information about the Paycheck Protection Program and more information on EIDL.
This article was originally written on May 19, 2020 and updated on November 15, 2023.