SHERIDAN – As the old saying goes, more money brings more problems. And that’s true for local businesses wondering how Payroll Protection Program loans fit into their tax strategy this season.
The loans – issued by private lenders and backed by the Small Business Administration – have been a lifeline for businesses in Wyoming and the country, allowing them to keep workers on the payroll and fund other expenses. including rent, utilities and personal protective equipment.
More than $ 523 billion of those loans were distributed in 2020 alone, with $ 1 billion going to businesses in Wyoming, according to the United States Office of Personnel Management. And there’s more to come: The “second draw” of PPP loans is open to local small businesses until March 31, according to First Interstate Bank Market President David Hubert.
While the PPP has served businesses well, the tax implications associated with these loans have proven to be confusing in recent months. Following the passage of the Coronavirus Aid, Relief and Economic Security Act in March 2020, the Small Business Administration slowly issued lending guidelines that have changed several times. The rules for PPPs and taxes changed again in December with the passage of the 2021 Supplementary Credits for Coronavirus Response and Relief Act.
That’s a lot to follow, even for those in the banking industry, according to John Laible, credit analyst at First Federal Bank and Trust. And this year, more than others, it might be helpful for small businesses to work with a certified public accountant.
“I think it’s important for small business owners to know that there is help from local CPA firms, and I encourage them to use this resource,” Laible said. “If they choose not to use a CPA or are unable to use a CPA, they should become familiar with the PPP program and know what is required for their business and do their best to obtain and keep the required documentation related to it. to the PPP loan. “
The biggest questions about P3s as tax season approaches have revolved around deductibility and taxation. And, like most P3 loan questions, the answers have changed a bit over time.
According to CRRSAA, a canceled PPP loan is completely tax exempt and does not count as taxable income. Normally, a canceled loan will be counted as a canceled debt, which is considered taxable income. However, based on the rules of the CARES law, this will not apply to canceled PPP loans.
Regarding deductibility, previous guidance from the Internal Revenue Service and the US Treasury Department stated that expenses funded by the PPP loan could not be deducted for tax purposes. This was essentially reversed with the adoption of the CRRSAA, which declared that expenses paid with PPP funds could be written off as daily business expenses.
“Without a legislative solution, small businesses with canceled PPP loans or those with a reasonable expectation of cancellation faced tax increases of up to 37% for 2020,” the Small Business Administration wrote in a statement. December 28 press release. “For many small businesses, such an increase would be devastating to their financial health and create an insurmountable deficit in the uncertain economic times that the pandemic has created. Finally, Congress stepped in and clearly stated business expenses paid with canceled PPP loans are deductible. “
According to H&R Block, it’s a good idea to have supporting documents used in calculating your P3 loan forgiveness as tax season approaches. Different levels of documentation are required for different business structures, according to Laible, and it’s good to understand your business structure before you prepare your tax returns.
“Small business owners need to know their entity structure and how they filed their taxes the previous year,” Laible said. “Most businesses are LLCs and can file as a sole proprietorship, partnership, or corporation. This is important because different entities have specific documentation requirements and guidelines for the PPP program. I would recommend checking with a CPA or accountant for further advice regarding this matter.
While small business owners prepare their taxes, many are also eligible for the second drawdown of the PPP loan, which is available to businesses that have received a first PPP loan; have 300 employees or less; can show a 25% reduction in revenue in any quarter of 2020 compared to the same quarter in 2019; and were in service before February 15, 2020.
A second loan cannot exceed $ 2 million and is calculated by multiplying an organization’s average monthly salary cost for 2019 by 2.5 – or 3.5 for employers in the accommodation and food services industries.
During this second round of PPP, eligibility for first-draw loans also expanded, and the 501 (c) (6) s, destination marketing organizations, housing co-ops and some news organizations are now eligible, according to Hubert. The first draw is open to small businesses and 501 (c) (3) with 500 or fewer employees, as well as sole proprietorships, independent contractors and self-employed workers.
A first-draw loan cannot exceed $ 10 million and is calculated by multiplying an organization’s average monthly salary cost for 2019 by 2.5.
The process for handing over first and second draw PPP loans remains subject to further clarification from the SBA, according to Hubert. What is known is that at least 60% of the loan proceeds must be spent on salary costs for the loan to be canceled.
If they apply for a second loan, clients have to work with the same bank that provided the original PPP loan, Hubert said. This lender will already have most of the required documents, which means the borrower only has to complete the new application and show a 25% reduction in income.
Hubert said demand for the second draw has been strong so far – a trend he plans to continue through March.
“We have already seen a strong demand for this round of PPP loans from the communities we serve,” said Hubert. “Many businesses still need support to survive the economic pressures of the ongoing pandemic. The reopening of the PPP could not have come at a better time.
For more information on PPP and loan forgiveness reporting requirements, visit SBA.gov.
With additional reporting by Kristen Czaban.