Due to the adverse effects of COVID-19 on many small businesses nationwide, Congress announced the Coronavirus Aid, Relief, and Economic Security Act — commonly abbreviated as the CARES Act. The $2.2 trillion economic stimulus bill ensures emergency assistance and health care response to people and small businesses facing unfortunate situations due to the 2020 coronavirus pandemic. Chief among the Act’s provisions is an initiative to provide struggling business owners with loan assistance to cover operating costs. This initiative is called the Paycheck Protection Program, or PPP.
What is the Paycheck Protection Program Loan?The Paycheck Protection Program (PPP) is a loan program designed to grant quick and direct access to small business loans with 500 or fewer workers. The PPP loan’s main focus was to support employers with payroll and operational costs during business interruptions that occurred because of the COVID-19 pandemic. Notably, borrowers could apply for PPP loan forgiveness. The PPP has had a significant impact on small business owners struggling with their business during the coronavirus pandemic. In 2020 alone, over $500 million in loans were granted to eligible businesses. Although the PPP offered considerable help to these businesses, the tax implications linked with these loans have left many business owners questioning what to do next. As a result of the CARES Act, the tax guidelines passed by the Small Business Administration (SBA) went through several changes. Later the rules related to PPP and taxes were revised again in December 2020 since the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) passed in 2021. The PPP loan application duration was prolonged from July to August, then December, and then March 31, 2021. Now the new extension date is May 31, 2021. The PPP remains accessible for:
- Small businesses with 500 or fewer workers or small businesses that fulfill the SBA’s size requirements
- Restaurants or other businesses that lie within the North American Industry Classification System (NAICS) code 72, “Accommodation and Food Services,” — and employ fewer than 500 workers
- Tribal businesses
- 501(c)(19) veteran entities
- 501(c)(3) nonprofit organizations
- Sole proprietors, freelance contractors, gig economy workers, and otherwise self-employed people.
Are PPP loans taxable?Section 1106 (i) states, “the CARES Act provides that any amount that would be includible in the gross income of the recipient by reason of forgiveness of a PPP loan shall be excluded from gross income.” One factor that makes the PPP appealing for businesses is the forgiveness provision. This provides loan forgiveness if the amount is used on the following expenses:
- Payroll expenditures
- Mortgage interest
- Utility bills
- Operational expenses
- Property damage costs (because of public disruptions in 2020)
- Supplier prices
- Worker protection expenses