COVID-19 has changed everyday life in countless ways. For many companies, operations came to a halt in 2020. The federal government also implemented several programs designed to help businesses cope with the economic fallout from the pandemic.
Assistance from the government provided a lifeline that has kept many businesses afloat. Those programs have tax implications, however, and recipients often have questions about how assistance they received will affect their tax bills in 2021.
In some cases, it was not immediately clear how government assistance would be treated for tax purposes. Since programs were implemented, the federal government has clarified the rules and, in some cases, changed course. While things may change before April 15, here is what we know now.
Paycheck Protection Program (PPP)
The Small Business Administration issued PPP loans to help companies cover payroll, rent, mortgage interest, and utilities. Loans can be forgiven if they are used on qualifying expenses.
The Internal Revenue Service initially issued guidance stating that expenses paid for using PPP funds would not be tax deductible. That meant that business owners could have to pay taxes on expenses that would ordinarily be deductible.
In December, Congress passed, and President Trump signed, a bill that clarifies and allows for businesses to deduct forgiven PPP expenses – overriding the IRS guidance. Since the law that established PPP is complex, business owners may face an unexpected tax bill for other reasons, depending on their circumstances.
Economic Injury Disaster Loan (EIDL)
The Small Business Administration offered Economic Injury Disaster Loans to help companies deal with the effects of the pandemic. While EIDL loan proceeds are treated the same as any other loan, the advance (grant) is taxable. Expenses paid with EIDL money is tax deductible.
Employee Retention Credits
Companies that were required to fully or partially suspend operations due to COVID-19 or that had their gross receipts fall by 50 percent or more compared to the same quarter of the previous year could be eligible for Employee Retention Credits if they didn’t take out a PPP loan. Employee Retention Credits reduce the amount of taxes owed directly, rather than lowering taxable income.
Get Professional Help with Your Taxes
DOAAR provides bookkeeping, tax, and consulting services for small businesses. We have been keeping up with all the rules and latest updates on these government assistance programs. Need help? Have questions? A member of our team can explain how they apply to your company and your situation and prepare your tax returns for you in 2021.