The Paycheck Protection Program (PPP) is likely the most discussed of all the federal programs issued to address the impact the COVID-19 pandemic has had on our economy. Millions of employees across the country were left without income after nearly every small business in America was forced to temporarily close its doors. This set in motion the most difficult economic downturn our nation has seen since the Great Depression.
To reduce the worst of the effects of mass closures, the federal government issued the PPP to give the economy a shot in the arm by essentially substituting the lost revenue with government funding. As the name suggests, the purpose of this money was primarily to cover the non-existent wages of the employees affected.
While this helped millions of workers who would have otherwise been left without income, the businesses that utilized this program must now account for it in their tax filings. The PPP was implemented incredibly quickly and underwent several changes in scope and terms. It comes as no surprise that filing the related taxes has left many employers scratching their heads trying to figure out exactly how they are supposed to file. In this article, we discuss some key pieces of information about the tax implications of the PPP. That said, it should be noted that this piece is not intended as tax advice but rather key considerations for employers who signed on to the PPP.
Understanding the Tax Implications of Relief Programs
From a tax standpoint, PPP funds are not considered revenue, despite the fact that the money was intended to offset revenue that was lost. The PPP was issued as a loan – one for which most businesses were able to receive forgiveness. Even if you received PPP funds, you can still claim the Employee Retention Tax Credit, though, some earning are not allowed including earnings paid with PPP funds that are ultimately forgiven, payments through the Emergency Medical Leave Act, and Work Opportunity Tax credits.
Considering the fact that PPP loans can be applied retroactively for 2020, it has a lot of value for many businesses that were hit hard by the pandemic. However, it is essential for employers to understand that that the tax deduction of those wages will be significantly reduced as a business expense by receiving the tax credit. For instance, if you paid $44K in wages and received an Employee Retention Tax Credit of $30K, you would only be able to claim the difference ($14K) as a tax-deductible expense.
Additionally, some employers utilized Social Security deferral. As part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES), this program included a suspension of employer payments to the government. While the deferral period for this program ended in 2020, the tax liability was only deferred, not waived. Therefore, the money is still owed.
Opportunities for Assistance
Some businesses such as entertainment venues and the like that were forced to close their door due to the pandemic are eligible for a grant for Shuttered Venue Operators, included in the last round of COVID-19 relief. However, by receiving a PPP Loan, you are no longer eligible to receive the grant. Venue operators trying to obtain this grant must provide documentation of the impact that the pandemic has had on their business when applying.
Another major relief measure was an update to the allowed payment methods for employment funding. Section 127 of the tax code allows businesses to help pay off employee student loan debt. This can be a valuable benefit to employees with student loan debt as it allows businesses to help pay employee debt without tax implications. Section 127 was extended through the end of 2025 and is a great opportunity to add more relief.
These are just a few examples of the many opportunities that businesses have with current COVID-19 relief programs. You’ll want to review information from the US Treasury Department for more details on the different relief options and their tax implications.
With all of the new federal programs that have been implemented to provide businesses with relief and the many revisions among them, it is fairly certain that your tax professional will need to do more research to understand the tax implications and how they will impact your business. With this, employers should understand that the process of filing will likely take longer than usual, so they should file as early as possible.
Another great opportunity for employers to find assistance is through Small Business Development Centers (SBDCs). SBDCs are a service of the Small Business Administration that offer free business advice for employers. A consultation would likely help to uncover even more potential opportunities to reduce tax liability and avoid costly filing mistakes.