Federally, any PPP loan that is forgiven will not be viewed as income. However, Massachusetts currently has a split decision on how a business is taxed on a forgiven PPP loan. All C corporations (usually larger businesses) whose PPP loans have been forgiven will not have to pay taxes on the funds. Every other small business whose income is reported on the owner’s return (S corporations, partnerships, trusts, and sole proprietors) is subject to personal tax law, so their forgiven PPP loan will be taxable at 5%. If you had a PPP loan of $100,000 and you were not a C corporation, you will owe $5,000 on the amount that was forgiven. If your loan has not been forgiven yet, it will be 2021 issue.
There’s been a lot of discussion at the state level as to the best way to resolve this issue fairly for all business owners. Politicians are looking into how they can make the situation more equitable. In the meantime, if you had your loan forgiven in 2020 and are one of those businesses who would be taxed on your forgiven amount, Heather’s recommendation is to file an extension for the March 15 deadline and for your personal return and then see what laws get passed. That way, you won’t have to amend your return later if the tax law changes.
Banks now have their one-page loan forgiveness application available for PPP recipients to complete. That will be the easiest way for any businesses with PPP loans under $150,000 to have their loan forgiven. If you are eligible for Round 2 PPP funding, make sure you apply by March 31. Even if your revenue didn’t decline by 25% in a year, you may still qualify for additional PPP funding if your revenue declined by 25% in any given quarter. Round 2 PPP funding will also be forgiven as long as it is used for eligible expenses such as payroll and rent.
Many people are concerned about the IRS’ ability to function properly right now. They still have almost 7 million tax returns from 2019 they have not processed, and they also started this tax season three weeks later than usual; they are still being adamant about not extending the tax deadline this year, however. That may change after the COVID relief legislation currently before Congress passes. Please be patient with your CPA this year, as there are many changes and challenges to juggle.