CORONAVIRUS

Paycheck Protection Program (PPP): will I be taxed on my loan?

A PPP loan can be forgiven if at least 60% has been spent on employee payroll. Loans issued before 5 June have a maturity of two with interest rate of 1%.

Paycheck Protection Program (PPP): will I be taxed on my loan?
Sean Gardner AFP

The $660 billion Paycheck Protection Program (PPP) was passed as part of the CARES Act in March to give financial aid to small businesses, providing loans to pay salaries and other expenses during the coronavirus crisis. The loans would be written off, or forgiven, as long as all employee retention criteria are met, and the funds are used for legitimate expenses. Small businesses can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. According to the SBA and the Treasury Department, $4.9 million in loans have been issued so far with the average size of each loan at $105,328.

Forgiven PPP loans

A PPP loan can be forgiven if at least 60% has been spent on employee payroll costs. The other 40% can be used for mortgage, rent and utility payments. Loans issued prior to 5 June have a maturity of two years while those that were issued after 5 June have a maturity of five years with interest set at 1%.

Forgiveness is based on employers continuing to pay employees their full salaries as normal during the eight weeks after the loan was taken out. The Treasury Department recently released the PPP Loan Forgiveness Application, which will need to be filled out by all businesses seeking forgiveness and then submitted to the private lender who approved the loan. All businesses that have accepted a PPP loan or are considering a PPP loan should closely look over the application early in the process to make sure they are compliant. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

PPP loans affect tax benefits

A forgiven PPP loan is considered exempt from tax. However, expenses used for PPP forgiveness cannot be deducted on a tax return and some businesses might find that they will end up paying more tax in next year’s declaration because by taking up a PPP loan, they have effectively reduced their tax deductions. That is why for some, taking up a PPP loan might not be worthwhile as it could incur losses if the recipient’s previous tax benefits are drastically reduced or lost completely. 

Employers whose Paycheck Protection Program (PPP) loan has been fully or partially forgiven are now eligible to defer the deposit of the employer portion of Social Security tax.

Federal income tax and relevant deductions when a taxpayer receives a covered loan is explained in depth in Notice 2020-32 by the IRS:

Applications for PPP loans have been extended to Saturday 8 August with the deadline at midnight.

See also

Stimulus check: McConnell gives date for Senate debate to begin

Stimulus check: why are some payments being canceled?