Taxation of PPP Loans: What Employers Need to Know

Earlier this year, Congress passed the CARES Act, which included a coronavirus stimulus package for small businesses known as the Paycheck Protection Program (PPP).  The intent of the program was to provide business loans to qualifying businesses as a means of guaranteeing them enough cash to pay eight weeks of payroll to their employees. Additional funds to help businesses pay their rent, utilities and remain viable, were also made available.

Loans made under the PPP program were available in amounts of up to 2.5 times a business’s average monthly payroll (up to $10 million dollars, whichever was less), and the government noted that up to 100% of the loan could be forgiven if businesses followed certain guidelines.

Many businesses were eligible to apply, such as restaurants and hotels with fewer than 500 employees per location, independently owned franchises, gig workers, independent contractors, self-employed workers and sole proprietors, among others.

Loan forgiveness

Legislators noted that part or all of applicants’ PPP loans could be forgiven if the applicant met certain guidelines. For example, all full-time equivalent employees would need to either 1) remain on the payroll or 2) be re-hired by Dec. 1, 2020 or within 24 weeks of receiving the loan, whichever came first. Sixty percent of loan forgiveness would need to go to payroll costs, whereas the other 40% loan forgiveness could be used for non-payroll expenses, such as rent and utilities.

Tax ramifications

Although most businesses still need to pay taxes on their cancelled debt, PPP loans are a bit different. According to government officials, the federal government does not view PPP loans as taxable income. The question as to what’s going to happen at the state level is less clear.

Whether a forgiven Payroll Protection Program loan will be taxed at the local and state level, varies based on where a business is located. If you have questions about what your tax liability might be when it comes time to file your quarterly or annual taxes, it’s best to speak with a seasoned tax professional.

Financial service providers you can trust

Hughes, Snell & Co. has been providing comprehensive financial services since 1974. We understand the value of providing individualized, personalized service to each of our clients, because we know that everyone’s needs are unique. Regardless as to whether you need help with tax prep and planning, estate, trust & retirement planning, or you’d like financial consulting and business planning services, we’re here to help. Call our office today to learn more.