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Will PPP Loans Be Taxed?

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Updated

Many small businesses in the U.S. have used funds from the Paycheck Protection Program (PPP) to help them stay afloat during the COVID-19 pandemic.

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What are PPP loans?

The Paycheck Protection Program (PPP) has provided financial assistance to small businesses that have been impacted negatively by the coronavirus pandemic. 

The PPP was part of the Coronavirus Aid, Relief, & Economic Security (CARES) Act, which Congress passed in March 2020. Lenders started accepting applications on April 3, 2020.  

A maximum PPP loan would consist of 2.5 months worth of average payroll costs for the prior 12 months. When receiving the loan, businesses weren't subject to taxes since there was an obligation to repay the loan.  

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During the COVID-19 pandemic, $2.2 trillion was disbursed to help businesses. Also, individuals who lost their jobs may have received supplemental unemployment benefits.  

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How to get PPP loan forgiveness

Just like student loans may be forgiven if certain conditions are met, PPP loans can also be forgiven. The money paid to businesses facing losses amid the coronavirus pandemic had to be utilized correctly to be eligible for forgiveness. 

In order to have a PPP loan forgiven by the federal government, 60 percent of the proceeds of the loan had to be used for payroll expenses. Other qualifying expenses include:

  • health insurance for paid sick, medical, or family leave
  • mortgage interest payments
  • rent
  • utility payments  
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Businesses that want to have a PPP loan forgiven need to fill out an application for forgiveness. Usually, expenses like payroll, rent, and utilities would be tax-deductible. However, if PPP loan funds were used to cover those expenses, the business owner may not deduct those costs and may owe more taxes.  

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A loan that can be forgiven is often considered taxable income. According to the Small Business Administration, Congress placed the stipulation within the CARES Act that forgiven PPP loans wouldn't be included in taxable income. 

Will PPP loans be taxed at the federal level?

Based on the guidance of the CARES Act, funds received from a PPP loan that is forgiven won't be taxable at the federal level. Other stimulus funds shouldn't be taxed either.  

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Will PPP loans be taxed at the state level?

Even if small businesses follow the stipulations of 60 percent of their loans going to cover payroll and any other loan funds being used for qualifying expenses, forgiven loans may be taxable at the state level in some states. 

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The Internal Revenue Code (IRC) said that some states have static conformity with the IRC. However, the Small Business Administration said, “21 states and the District of Columbia are rolling conformity states, meaning they automatically conform to the most current IRC for both individual and corporate income taxes.” 

In those states, taxpayers won't need to include forgiven PPP loans in their taxable income at the federal or the state level. However, in other states like California and Wisconsin that have static conformity, they must vote to change their conformity date and can tax forgiven loans.  

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