Kelsey Sheehy is a senior writer and NerdWallet authority on small business. She started at NerdWallet in 2015 and spent six years as a personal finance writer and spokesperson before switching gears to cover the financial decisions and challenges faced by small-business owners. Kelsey’s work has appeared in The New York Times, The Washington Post, Nasdaq and MarketWatch, among other publications. Kelsey has appeared on the "Today" show, NBC News and ABC’s "World News Tonight" and has been quoted by the Los Angeles Times, CNBC, American Banker, NPR and Vice, among other publications. Prior to joining NerdWallet, Kelsey covered college (and how to pay for it) for U.S. News & World Report. She is based in Washington, D.C.
Assigning Editor Sally Lauckner
Assigning Editor | Small business
Sally Lauckner is an editor on NerdWallet's small-business team. She has over 15 years of experience in print and online journalism. Before joining NerdWallet in 2020, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content and specializing in business financing. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She is based in New York City.
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The approaching tax season is raising fresh questions for business owners who received a loan through the Paycheck Protection Program .
Can you deduct expenses paid with your loan funds? Do you need to do anything differently this year? And if your loan is forgiven, is it considered taxable income?
Answers to these questions have been hard to nail down, in part due to shifting guidance from the IRS. But new rules spelled out in the latest round of coronavirus relief help put an end to the confusion.
“Doing your taxes wasn’t easy before COVID,” says Keith Hall, president and CEO of the National Association for the Self-Employed. “The good news is this year isn’t going to be any harder than tax returns you’ve had in the past.”
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
“Historically and forever, if you have a business loan and it is forgiven, that automatically is taxable income. It’s been in the internal revenue code forever,” Hall says.
Paycheck Protection Program loans break from that code. Congress specified, and the IRS clarified, that forgiven PPP loans will not count as income. This applies whether your entire loan is forgiven or just a portion.
“If it is forgiven, it will not be taxable income. Period,” Hall says.
This one has been more of a moving target. Initially, the IRS’ position was this: Expenses paid with PPP loan funds can't be deducted if the loan was or will be forgiven.
However, that changed with the coronavirus relief act signed into law on Dec. 27, 2020, which specifies that deductions shouldn't be denied simply due to the loan being forgiven.
That means expenses paid with your PPP loan are deductible.
This outcome effectively creates two layers of tax benefits for PPP loan recipients, says Roshani Pandey, financial advisor and founder of True Root Financial in San Francisco.
“The first benefit is making the loan income-tax-free,” Pandey says. “The second is allowing businesses to claim income deductions on expenses paid.”
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The latest round of coronavirus relief also gives business owners more flexibility with how they spend PPP funds. Newly covered costs include protective equipment, property damage and business software.
Business taxes aren't part of that expanded list. So if you use your PPP loan to pay your business taxes, that amount won't be forgiven.
on Accelerate Tax's website
Businesses can now claim the Employee Retention Tax Credit if they meet the requirements. There's one important caveat: You can’t claim wages paid with a forgiven PPP loan.
You can, however, claim the credit on wages paid above and beyond the amount forgiven.
To qualify for the tax credit, you must continue to pay employees despite being temporarily shut down because of COVID-19 restrictions or suffering a 20% drop in gross receipts compared with the same quarter in the prior year.
These changes were ushered in with the coronavirus relief bill on Dec. 27, 2020, but are retroactive to March 12, 2020. The credit is good on qualified wages paid up to July 1, 2021.
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Kelsey Sheehy is a senior writer and NerdWallet authority on small business. She has appeared on the "Today" show and NBC News, and her work has been featured in The New York Times, The Washington Post, Nasdaq and MarketWatch, among other publications. See full bio.
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