Taxation of Grants & Loans
You might think that a forgivable loan and grant funded through the same Act of Congress would be carry the same tax consequences, but guess again: we all know the IRS always keeps things less than straightforward. Here are some guidelines (with of course a caveat to consult with your tax professional):
The IRS has confirmed that a grant to a business constitutes gross income under the Internal Revenue Code and therefore is taxable. This makes sense from the point of view that the grants are meant to fill the gap in revenue due to Covid, but less sense if the amount was used for PPE or other Covid mitigation measures for the benefit of the public. You might want to check with a tax advisor on the tax treatment of any grant amount used for those measures.
Meanwhile, for PPP loans that are forgivable, the outcome is more tax neutral. The cancelled debt is excluded from gross income. Accordingly, expenses paid with the proceeds are not deductible, but neither is the forgiven loan amount taxable. Treasury guidance on this matter here.
How to get PPP Loans Forgiven
Guidance and details on PPP Forgiveness is now available.
Work with trusted advisors to set up and keep accurate records. The best way to remain prepared is to standardize your record keeping for your PPP loan and to have all your documents easily accessible. Focus on records for the allowable uses under your PPP loan, such as payroll reports, utility expenses, mortgage interest and rent expenses. If you need assistance with this, contact us and we can refer you to a great, local, no-fee resource at firstname.lastname@example.org.
Three PPP Loan Forgiveness Application Forms are now available:
Plan to submit records that can be quickly and easily reviewed by your lender. Remember your lender will have thousands of these PPP forgiveness applications to review, so keep your application concise and to the point. Maintain more detailed records for up to 7 years for any possible additional followup or review.
When to apply. Borrowers have time to wait to file for forgiveness. Borrowers may apply for loan forgiveness as soon as they have met the eligible use criteria, or, at any time up until 10 months after the end of your covered period (10 months + 24 weeks).
Work with your bank. Wait for guidance from your lender on when to apply for PPP loan forgiveness. Many banks are also waiting for final rulings and anticipated changes to the Paycheck Protection Program. Lenders are building out their own internal systems to process these efficiently and through their websites.
Other tools to assist you through the Paycheck Protection Program (PPP) forgiveness process are available. Watch for new content from trusted sources like the Colorado Small Business Development Centers, the AICPA and your CPA.
Source: Colorado Office of Economic Development and International Trade verified by the SBA.
On the topic of forgiveness, with PPP changes enacted June 5th, businesses now have 24 weeks to spend towards forgiveness through December 31st. That gives you more time to convert the loan to a grant (and more now can be used for overhead versus payroll).
- This article from Forbes points out that while the PPP loans can be almost entirely forgivable, the fine print reveals some limitations. However, the legislation enacted 6/5 now allows 40% of the loan to be used for mortgage interest, rent and utilities and still be forgiven, with the remainder of 60% required to be spent on payroll. This Forbes article uses a hypothetical business to share tips like what documents to prepare, the fact that the loans have no prepayment penalty, and any amount forgiven will not be taxed. It also describes what documents to get ready while waiting for a bank and the SBA sort through glitches in program roll-out.
- Do you have questions about rehiring or headcount. For example, do you have to rehire the same employees? Can I reduce compensation of employees and still get forgiveness? What do I do if my employees won’t return to work? How do I meet the headcount requirements (which are now extended to December 31st)? Check out these PPP FAQs on Rehiring Employees with answers to these questions so you can get your full forgiveness.
Covid-19 Employer Retention & Leave Credits. If you didn’t get the PPP, these retention credits can provide 50% of the qualified wages paid from 3/13-12/31/20 this year. There are also credits for all small employers who pay sick or family leave.
Last, you might also check out this compilation from the SBDC provides many more resources, and is updated regularly as more information comes in and programs roll out.