At the start of the COVID-19 pandemic, the US government implemented a loan relief program to help small businesses affected by the crisis.
Businesses were able to use these Paycheck Protection Program loans to maintain payroll, rehire employees who may have been laid off, and cover applicable overhead costs.
More than 11.4 million loans totaling nearly $800 million have been sent out, according to the Small Business Administration. The loans are offered at low interest rates and with the possibility of forgiveness.
Some social media posts are confusing the tax implications of these loans.
“PPP LOANS MUST BE REPORTED ON THE TAX RETURN because the GAME just changed!!” said a message on Facebook.
The post was flagged as part of Facebook’s efforts to combat fake news and misinformation on its News Feed (learn more about our partnership with Facebook).
Comments on the post show that people interpreted it in at least two ways:
Businesses must acknowledge on their tax returns that they have received a loan.
Businesses must now report loan proceeds as taxable income.
Individuals with questions or concerns about their particular situation should speak to a tax professional for advice. But here are some general facts about PPP loans.
First, it should be noted that there is a difference between loan proceeds and canceled loans.
Since a loan means you borrow money from a lender or a bank, it is not considered income and therefore not taxable.
Generally, for loans that are canceled, canceled or canceled, the canceled debt is taxable. But that’s not the case for PPP loans, which are tax-free whether or not the loan has been forgiven.
TaxAct, a tax preparation software company, explained that canceled PPP loans are not considered debt forgiveness income, so such proceeds should not be reported on tax returns.
This applies to all taxpayers, whether sole proprietorship, single person LLC, partnership, multi-member LLC, corporation or any other entity type.
When it comes to reporting loans, companies are generally not required to report that they have received the loan. However, they would have to report certain information if the loan was canceled, said Eric Smith, spokesman for the Internal Revenue Services.
Smith pointed to IRS filing instructions that say, “PPP loan forgiveness creates tax-exempt income, so although you don’t need to report your PPP loan forgiveness income on Form 1040 or 1040-SR, you do so must report certain information about your PPP loan.”
Reporting can occur in different ways depending on how the business is organized. Some businesses, such as sole proprietors, must file a Schedule C tax form with their tax return to report profits or losses. This is where the loan information would go if the business deducted related expenses.
Additionally, with the passage of the Consolidated Appropriations Act of 2021, expenses paid with PPP loan proceeds are tax deductible whether or not the loan has been forgiven.