The Tax Implications of Paycheck Protection Program Loan Forgiveness

One of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was to introduce the Paycheck Protection Program. This allowed small business to obtain crucial funding and keep their staff employed through the pandemic. Now that the dust has settled on the three rounds of PPP loan funding, it important to consider the tax implications of these loans and the forgiveness thereof.

First off, if the loan was not forgiven (the business for whatever reason did not qualify for forgiveness), the loan is treated the same as any other debt. The principle will be required to be paid back and the interest will be deductible as a business expense.

If the business does qualify for forgiveness, the amount forgiven will be treated as tax-exempt income. This created some initial confusion as expenses incurred to generate tax-exempt income are generally not deductible (thus making the forgiveness essentially taxable in a roundabout way). As this was not the intent of congress, the CARES Act was amended by the Tax Relief Act of 2020 to allow for these expenses to be fully deductible. This was a win-win for taxpayers as it allowed for the exclusion from income of the forgiveness while still being able to deduct the payroll, rent, utilities, and other qualifying expenses used to obtain the forgiveness.

If you or your business has taken advantage of the tax-favorable provision and have questions or need assistance applying for forgiveness, please reach out to one of our advisors. We are always happy to help!

By: Matt Goodfellow, CPA- Harris CPAs

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