If you received a paycheck protection program (PPP) loan in 2020, it may be time to start thinking about how this will impact your 2020 taxes.
The PPP loan is unique because if you use the funds in a certain way, your entire loan can be completely forgiven. To get your PPP loan forgiven you have to apply for loan forgiveness through your PPP lender. For a refresher on the forgiveness process you can check out our dedicated guide to PPP loan forgiveness.
Unfortunately, the PPP forgiveness processing times are longer than expected. Many borrowers will not receive a decision on their forgiveness application until after their 2020 tax deadline. The aim of this loan is to provide businesses with the money they need to keep running and continue paying employees—not to create a tax burden for businesses receiving the funds.
Read on to learn exactly how your PPP loan could impact your 2020 tax filing.
Will my forgiven PPP loan amount be taxable income?
The CARES Act spells out that the PPP loan amount is not included in the borrower’s taxable income. That means you don’t pay taxes on the PPP money you receive. This applies if you haven’t applied for forgiveness yet, are waiting on your forgiveness decision, or have received forgiveness on a portion or 100% of your PPP loan. No matter where you are in the forgiveness process, your forgiven loan is not taxable income meaning you do not include it on your 2020 tax return.
Will my owner compensation replacement amount be taxable income?
It’s unclear whether how owner compensation replacement (OCR) will be treated. For partnerships, owner compensation replacement is paid out through guaranteed payments reported on each partner’s Schedule K-1. These payments are taxable on each partner’s personal income tax return.
But for sole proprietors, their personal income tax return is their business tax return. If they take OCR, it might not be considered taxable income because the business isn’t technically paying the business owner their OCR.
If you are taking OCR from your business, check in with your CPA or tax professional for the best way to handle it given your business structure.
Will expenses covered by a PPP loan be tax deductible?
Previously the IRS stated expenses covered by a PPP loan would not be tax deductible.
But on December 22, 2020, a bill was passed that clarified these expenses will be tax deductible. Businesses can now claim all expenses covered by a PPP loan on their 2020 tax return.
What about the PPP recordkeeping requirements?
Receiving a PPP loan no longer affects your taxes. But this doesn’t mean you can let your recordkeeping slide.
Good recordkeeping and bookkeeping is critical for getting your loan forgiven. It’s important to stay on top of how you use your PPP funds as you use them. Make sure you are logging each transaction and collecting any corresponding document. At Bench, we can automate tracking your transactions and provide you a platform to upload your documents for safekeeping. Learn more about how Bench can help with the PPP and more.
Your business also needs to have complete financial statements at the end of your fiscal year. Your lender and the SBA have the right to request and audit your business’s financial documents and records for up to 6 years after the loan has been forgiven or repaid. Penalties may include imprisonment or fines.
Further reading: PPP Audits: What You Need to Know
- Paycheck Protection Program (PPP) Loans Resource Hub for Small Business
- How to Apply for Your Second PPP Loan
- Employee Retention Credits: A Simple Guide (COVID-19)
- The PPP, EIDL, and PUA: Everything You Need to Know
- What to Do if Your PPP Loan Forgiveness Application Gets Rejected
We’re an online bookkeeping service powered by real humans. With Bench, you get a dedicated bookkeeper and powerful reporting software for a crystal clear view of your financial health. All of our services are eligible expenses for PPP forgiveness, and we’ll even provide support in applying for the PPP (or getting that loan forgiven). Whatever happens next, we’re right there with you. Get started on a free trial today.