With tax season well under way and COVID-19 long from resolved, many employers have found themselves overrun with new tax requirements compared to last year. While the pandemic brought numerous waves of federal financial assistance, taking advantage of certain government programs may have set your business up to have more complicated taxes than you anticipated.
Luckily, potential loan forgiveness is a good complication to have. One federal program, the Paycheck Protection Program (PPP), has undergone updates in recent months to continue aiding employers. However, without filing your taxes correctly around PPP funds, you won’t be able to benefit from deductions or loan forgiveness.
Whether for a first or second draw PPP loan, let’s make sure you have all the necessary information to ensure the best outcomes of your tax filing and PPP management this tax season.
As you know, the PPP is a CARES Act program that was rolled out to assist employers with keeping employees on their payroll and managing costs associated with essential business functions during COVID-19. According to the Small Business Administration, over 5 million PPP loans have already been approved, with the average loan size totaling $100,729.
*Note: If your business is still in need of financial support, there is still time to apply for a second loan. The last day to apply for and receive a Second Draw PPP Loan is March 31, 2021. Visit the Small Business Administration’s page for more details.
At the end of last year, it was announced that PPP loans would be forgivable if at least 60% of the proceeds were spent on payroll costs and the remaining 40% on other approved items such as utilities and rent during the eight or 24-week period after disbursement. However, it wasn’t until later provisions from Congress that we learned how that would happen.
We now know that expenses paid with PPP funds will be a deductible, and that any forgiven PPP loans will not be included in the business’s income during tax filing. This is particularly important for contractors! With a lower overall income, additional financial might be gained by dropping into a lower taxable number.
PPP Loan Forgiveness and Other Tax Updates
While the rules for how to use the PPP loan funds are fairly straightforward, the tax effects still need some clarification. Now that we know those receiving forgiveness for PPP loans can deduct the expenses allowed under the program, let’s go over some of the important details for getting it done successfully.
Here are the major factors to consider for overseeing a profitable PPP loan and tax-filing process for 2020-2021:
- The categories that PPP funds are allowed to cover have been expanded, so be sure to include all applicable items for full credit and reimbursement. Ex. You may now include the following items: software, cloud services, accounting, HR, certain types of property damage, PPE, supplier costs, and more.
- You do not have to include debt forgiveness in your taxable income. While forgiven loan funds are generally includible as a portion of income, PPP loan forgiveness is an exception to the rule.
- You can defer payroll taxes under the CARES Act. You may defer payroll taxes from March 27 through Dec. 31, 2020. Fifty percent of the deferred taxes accumulated in 2020 must be paid by Dec. 31, 2021 and the remainder must be paid by Dec. 31, 2022.
- You cannot use PPP money to pay for business taxes or tax-filing, which includes income, sales, or tax liabilities. The PPP loan may only be used for certain identified categories of expenses.
- You can file an amended tax return. If you applied for forgiveness but have not received a decision from the IRS at the time of filing your return and later learn that you will not receive full or partial forgiveness, you may make adjustments by filing an amended return.
In addition to PPP updates, there are some other tax-filing updates that may be of note to you: the ability to defer FICA payments and the ability to receive employee retention credits, which allows businesses to deduct up to $10,000 per employee on their payroll tax returns for wages paid between March 20, 2020, and December 31, 2020.
Be sure you’re taking full advantage of the opportunities that are right for your business!
Tax Ease with Human Capital Management
In the midst of financial stress and evolving COVID-related changes, having a dependable HR solution can mean the difference between loan forgiveness and financial disaster. When you partner with EPAY Systems, our Human Capital Management (HCM) system makes payroll and tax filling easier than ever. Our robust payroll and tax solution even handles documentation and processing for employees who live and work in different states.
Safeguard your hourly workforce operation today. Request a live demo with one of our specialists!