If you received Economic Injury Disaster Loan (EIDL), EIDL advance that does not need to be paid back, or Paycheck Protection Program (PPP) you really need to understand tax treatment of these loans/advances and the rules associated with spending the loan proceeds.
Please do not relay your information on the social media or non-professionals as there has been a lot of misleading information on this subject. Always seek information from the source and from licensed and credentialed tax experts. You are the only one that will be responsible before the IRS and state tax authorities.
Economic Injury Disaster Loan (EIDL) and EIDL Advance
The Economic Injury Disaster Loan (EIDL) is a loan option made available through the Small Business Administration (SBA) to help businesses struggling with financial hardship due to COVID-19. There is no special tax treatment for this loan, and it is treated as any other business loan. Since this is a loan, and must be paid back, the proceeds are not taxable income, and the business may be able to deduct the interest paid subject to loan interest rules.
On the other hand, the EIDL advance is technically a grant for small businesses of up to $10,000. Because it is a grant, it does not need to be repaid. That means it is going to be treated differently than a loan on your tax return at the end of the year. The EIDL grant will probably need to be included in your taxable income. However, this is not definite as the IRS may change the tax treatment of the EIDL with the HEROES ACT, if ever released and signed into law. However, if it’s added to your taxable income, you’ll be able to deduct any expenses that you use to pay for this grant.
Paycheck Protection Program (PPP)
The Paycheck Protection Program (PPP) made available for businesses under CARES ACT who were struggling due to COVID-19. The PPP is a loan intended to provide cash flow for businesses to retain their employees and keep them off unemployment. Portion of the PPP loan amount can be forgiven, as long the money was spent on payroll (majority), mortgage interest, utilities, and rent.
The CARES Act made it clear that the forgiven loan amount will not be included in taxable income. That means taxpayers will not pay taxes on the forgiven amounts, but there is a catch. The IRS released a notice later clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.
To clarify, the expenses paid for with the forgiven loan are not able to be included as a tax deduction. Your business tax deduction lowers your taxable income. Without that deduction, you would owe more in taxes, so you may have to pay more taxes when filing your 2020 tax return.
It is important to mention that, when it comes to taxability, there is a correlation between Economic Injury Disaster Loan (EIDL), EIDL Advance and Paycheck Protection Program (PPP).
We at Taxville Financial take a consultative approach to help our customers make an informative and calculated decisions. We will analyze and discuss your situation with you and ensure you are in compliance with the Federal and State rules while maximizing your business returns. 2021 tax returns will require a lot more reconciliations and special treatments, so make sure you choose the right and credentialed tax expert to help you optimize your tax savings for your business.
Michael Zachary, EA CPHRC