CARES Act and taxes: What to know for your business
Editor’s Note: The article below was published on November 30, 2020. It includes updates from the American Rescue Plan (ARP) Act of 2021 and other recent legislation as noted.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) programs offered a much-needed lifeline for many businesses in 2020. Now that it’s tax time, business owners who took advantage of these programs will want to know how the CARES Act relief affects their taxes.
But evaluating these tax impacts can be daunting. According to an H&R Block study of small business owners, fewer than 1 in 3 (28%) are confident that they understand the financial and/or tax implications of receiving aid as a result of the COVID-19 pandemic.
To help you understand how your business might be affected, we’ve outlined tax considerations for the four business relief Programs under the CARES Act:
- Paycheck Protection Program
- Economic Injury Disaster Loans
- Employee Retention Credit
- Payroll Tax Postponement
We understand this information can be complex — and certainly, the details will vary by business and situation. If you have a specific CARES Act tax question, our Small Business tax pros are here to help.
“Do you have to pay taxes on CARES Act programs?”
We’ve heard this question and variations of it (“Is CARES Act aid taxable?”) over the last few months. What’s taxable or not, as well as any other tax implications, will depend on the specific program.
Read on for a summary of impacts. But keep in mind – some questions about these programs have yet to be answered. When we receive additional clarification from the IRS, we’ll update this page, but as always, be sure to check with your tax advisor.
Paycheck Protection Program: Is PPP taxable?
In spring of 2020, the Paycheck Protection Program allowed hundreds of thousands of business owners to borrow up to 2.5 times their average monthly payroll, up to $10 million.
One advantage of a PPP loan is if you follow the rules, your loan can be forgiven – meaning it’s more like a grant. While that’s welcome news, some still have wondered “is the PPP taxable?”
For federal tax purposes, a forgiven PPP loan is not taxable. Normally, a forgiven loan will be counted as cancelled debt, which is considered taxable income. However, based on the CARES Act rules, that won’t apply to forgiven PPP loans.
In the event your PPP loan is not forgiven, it’s treated like a normal loan and it’s not considered taxable.
What about deducting expenses? You may have heard that you wouldn’t be able to deduct expenses paid for with PPP loan money. That was true under previous IRS guidance.
However, thanks to changes with the Covid-related Tax Relief Act of 2020 (COVIDTRA), you will now be able to deduct qualifying expenses paid with proceeds from your forgiven PPP loan.
For state tax purposes, it will depend on your state’s rules. Some states will follow the federal rules, while others will adopt their own.
What does this mean for your taxes?
The timing of a forgiveness determination will vary greatly from business to business. It’s likely that many business owners won’t know the answer to that question as they head into tax season. COVIDTRA clarified that tax basis and other attributes of your business will not be impacted by PPP forgiveness.
However, it’s still a good idea to have supporting documentation used for your forgiveness calculation at the ready. This will help you determine what expenses may be available for other tax benefits such as an employee retention credit.
Economic Injury Disaster Loans (EIDL): Do you have to pay taxes on this CARES Act program?
Another popular option for relief under the CARES Act, Economic Injury Disaster Loans (EIDL), expanded eligibility to a long-running SBA loan program to those struggling financially from the coronavirus pandemic.
In spring and summer of 2020, small businesses could have received:
- an EIDL, allowing them to borrow up to $2 million and/or
- an EIDL Advance, which provided a cash advance that did not need to be repaid of up to $10,000.
If your business received one of these, you may wonder if you have to pay taxes on either part of this CARES Act program. COVIDTRA addressed this question and provides that emergency EIDL advances are not included in income and you may deduct otherwise deductible business expenses paid with an EIDL advance on your tax return.
As part of the ARP Act, certain hard-hit businesses may also qualify for a targeted EIDL Advance of $5,000. Review the latest about the Economic Injury Disaster Loans.
What does this mean for your taxes?
COVIDTRA clarified that tax basis and other attributes of your business will not be impacted by forgiveness of an emergency EIDL advance.
COVIDTRA further clarified tax treatment for partnerships and S corporations. Specifically, if you have a forgiven loan excluded from your business’ gross income:
- the income will also be tax exempt to partners and S corporation shareholders.
- tax basis will not be reduced as a result
Reporting other CARES Act benefits on your taxes
The Employee Retention Credit and Payroll Tax Postponement also offered small businesses relief from the financial impacts of the coronavirus crisis, but not in the form of loans or grants.
Employee Retention Credit (ERC) – The ERC was designed to help keep employees on the job by allowing business owners to claim a payroll tax credit. Because business owners claim it on their quarterly employment tax return (Form 941), the CARES Act benefit isn’t reported on their income taxes for their business.
If you claimed this credit, you should take note of the following:
- The ERC can reduce the expenses that you may otherwise deduct on your federal income tax return.
- The ERC for qualified wages is not counted as income. This includes any allocable qualified health plan expenses.
Note that the ERC was extended by the ARP Act. Review the latest about the Employee Retention Credit.
Payroll Tax Postponement (PTP) – During 2020, the PTP allowed employers to defer payment of their portion of Social Security and certain railroad retirement taxes. Like the ERC, these deferred payroll taxes are handled on the employment tax return, not the income tax return.
Self-employed taxpayers will calculate the maximum deferral amount for net earnings from self-employment on Part III of Schedule SE, which will ultimately be reported on Schedule 3 and Form 1040.
Help with CARES Act tax questions for your small business
Keeping on top of all the changes in today’s world is enough for any small business owner. However, your business and tax accounting needs shouldn’t be a cause of stress. We’re here to help if you need tax, bookkeeping, or payroll solutions for your small business.
Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Connect with us at blockadvisors.com.
Looking for more information about updated small business relief? Check out our Small business stimulus and tax relief page for the latest information.
Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.
Learn more about expenses for the self-employed with advice from the tax experts at H&R Block.
There are many benefits to separating your personal and business finances. Learn more with the tax experts at H&R Block.
How does the payroll tax deferral affect you? Find out from the tax experts at H&R Block what this means to your business and your employees.
When you’re starting a business, the growing list of tasks on your to-do list can seem like a daunting challenge at best, and overwhelming at worst.