Your 2020 taxes are likely going to look a little different than they normally do. Last year, a lot of new programs were created to help small businesses. This means you’re probably going to deal with situations you’ve never seen before including forgiven loans, grants, and unemployment benefits.
In this article, we’ll walk through how these three things will come into play when filing your 2020 taxes.
Is the PPP loan taxable?
The Paycheck Protection Program (PPP) is a lifeline for businesses who are currently struggling due to COVID-19. The PPP is a loan intended to provide cash flow help for 8 to 24 weeks, backed by the SBA.
What makes the PPP even more enticing for business owners is the potential that the loan amount can be forgiven, as long as the money was spent on the following:
Operational expenses (HR, software, cloud computing, or accounting needs—like Bench)
Property damage costs (due to public disturbances in 2020)
Worker protection expenditures
But with this new program came a question about how the IRS will view the money. If you meet the criteria for getting the loan forgiven, will the government tax you on the free money you’re receiving?
Is PPP loan forgiveness taxable?
The CARES Act spells out that the forgiven loan amount won’t be included in taxable income. That means you don’t pay taxes on the money that you receive. The aim of this loan is to provide businesses with the money to keep running and continue paying employees, not to create a tax burden for businesses receiving the funds.
With the passing of a second stimulus bill on December 27, 2020, we received clarity on how the expenses covered by a PPP loan will be treated.
Previously, anything you spent your PPP loan on was not going to be tax deductible, much to the frustration of CPA’s everywhere. Now, these expenses are tax deductible come tax season. Simply put, your PPP loan will not affect your tax filing process.
How Bench can help
Your signed PPP loan contract stated you would produce monthly, government ready financials. This means you are required to have bookkeeping in place. If you don’t, you could suffer penalties and fines or trouble with an audit.
With your Bench bookkeeper doing your monthly books, you can rest assured you meet the terms of the loan contract and have expense tracking in place to withstand an IRS audit.
Having someone on your side to help you through tax time, PPP forgiveness and deductions will provide great peace of mind. How else do you plan on staying on top of this ever changing information if not with Bench’s experts on your team?
In fact, Bench’s services are included the PPP’s forgiveable operations expenses. That means you can use your PPP loan to receive our assistance through the forgivess process, and then get the expense forgiven. Start a free trial today.
Is the EIDL grant taxable?
The Economic Injury Disaster Loan (EIDL) is a loan option available through the SBA to help businesses struggling with financial hardship due to COVID-19. The EIDL can be treated the same as any other loan, but what about the EIDL grant?
The second stimulus bill clarified that the grant will be tax-free. It does not need to be included in your taxable income when filing your taxes.
How the Employee Retention Credit affects taxes
You might find that the total amount of tax you owe has been reduced thanks to the Employee Retention Credit. This credit is available to businesses with fewer than 500 employees who either:
Suspended or partially suspended their business due to COVID-19 because of a government order or;
Experienced a 20% decline in gross receipts when compared with the same quarter in the previous year
Tax credits are incredibly valuable because—unlike a deduction which reduces your taxable income—tax credits reduce your tax liability on a dollar for dollar basis. So if you have a $10,000 tax liability and a $3,000 tax credit, the amount of tax you owe is now $7,000.
The credit is calculated per employee and is 70% of up to $10,000 in qualified wages paid per quarter. Qualified wages include the portion of your employees’ earnings you pay FUTA tax on and is reported on IRS Form 940, IRS Form 941, or Form 944. If you qualify for the credit and paid three employees $8,000 in qualified wages during a quarter, you’d be eligible for a credit of $16,800.
The employee retention credit can be claimed on your quarterly form 941.
How Pandemic Unemployment Assistance (PUA) affects taxes
One thing that can sometimes take unemployment recipients by surprise is finding out that yes—unemployment benefits are considered taxable income. That means you will have to pay state and federal taxes on the amount of money you receive, though you won’t have to pay medicare or social security taxes on it.
You can pay these taxes in two different ways. One option is to fill out form W-4V, and request that the taxes are automatically withheld from your unemployment benefits payments. If you don’t request to have taxes automatically withheld, you’ll need to make estimated tax payments during the year. Beware of this to avoid an unexpected tax bill.
When you’re filing your 2020 tax return, you’ll need to report the income you received from unemployment compensation. You’ll get a 1099-G slip from your state labor office that details how much you received and the amount, if anything, you had withheld for taxes.