As the end of the year approaches, many small business owners are beginning their year-end financial planning, making their final purchases for the year, and considering what expenses they can deduct from their 2020 taxes. This year, your tax deductions will likely look very different than in the past due to the tax regulations for business owners who got PPP and EIDL loans as well as individuals who received stimulus checks. In this post, we will break down what you need to know about taxes and any funding received from the relief bill.
How Does PPP Funding Impact My Taxes?
PPP funds are not considered taxable income by the IRS, so you will not be taxed on them. However, your PPP funds will impact your 2020 taxes. Under current IRS regulations, any expense that you spent your PPP money on that will be forgiven—such as rent—is not deductible from your 2020 taxes. Current rules state that you can only deduct expenses you spent your PPP funding on if they won't be forgiven by the SBA: essentially, the ruling states that business owners cannot "double dip" and get forgiveness from both the SBA and the IRS. PPP recipients are also not eligible for the Employee Retention Tax Credit, which allows business owners to deduct 50% of wages paid from their 2020 taxes.
This ruling actually applies whether or not you have applied for PPP forgiveness. Even if you haven’t applied for forgiveness yet, according to the IRS’ latest update you cannot deduct your PPP expenses from your taxes if you can “reasonably expect” your loan to be forgiven (since all PPP funds that follow the spending guidelines are forgivable, this will apply to almost all borrowers).
This is a huge change for most business owners, who usually can deduct any business expense from their taxes, including utilities and rent. You could be looking at a much higher tax burden this spring. If you’re planning year-end purchases and shaping your budget for next year, keep in mind that you will likely be paying more in taxes for 2020. If you can afford to, you may want to make some business purchases before the end of the year that you can deduct from your 2020 taxes to offset the difference. Deductible purchases include office supplies or equipment, software and more. You can find a list of deductible business expenses here.
How Do EIDL Grants and EIDL Loan Impact My Taxes?
EIDL funding is taxed differently than PPP funding. The up to $10,000 EIDL advances are currently considered taxable income by the IRS, unlike the PPP loans. However, there are no restrictions on deductions for EIDL advances—so you can deduct any business expense that you spent your EIDL funding on from your taxes.
This means that you likely will not be taxed on your EIDL funding at all, assuming you spent it all on deductible expenses such as payroll for your business.
EIDL loans (funding beyond the $10,000 advance) are not taxable income. The IRS does not tax any traditional loan which needs to be repaid, including EIDL loans.
Is My Stimulus Check Taxable?
No. Your stimulus check is not taxable income. Stimulus payments will have no impact on the amount you owe in taxes for 2020. Whether you got the standard $1200 payment, extra $500 payments for dependents, or a lower payment due to your income, your stimulus check is not calculated into your annual income for 2020. The stimulus check is also not a loan and does not need to be repaid.
Could EIDL and PPP Tax Rules Change?
It is possible that the IRS could change regulations on how PPP funds are taxed in response to criticism. Small business advocates and accountants have opposed the IRS’ ruling that PPP funding recipients can’t deduct the expenses they spent their funding on from their taxes. The American Institute of Certified Public Accountants has challenged the IRS, saying that the ruling goes against the intent of the PPP. Congress even drafted a bill to reverse the IRS' decision, but it hasn't passed yet. We will keep you updated if the IRS position changes, but for now you should plan to be taxed on expenses you spent your PPP funding on.
Conclusion: Keep CARES Act Funding Regulations in Mind with Your Year-End Financial Planning
Although the tax regulations for the PPP and EIDL could still shift, you should plan for now on paying taxes on all your PPP expenses and make your year-end purchases with this in mind. If you can afford to, now would be a good time to make some purchases you can deduct from your taxes to offset the tax burden from your PPP funding. We will keep you up-to-date on all PPP and EIDL tax changes here on the Skip blog, along with other government services related information and news.