Taxability of Government Programs
We are quickly approaching the end of the year and now seems like a good time to quickly revisit the taxability of the various programs put in place by the federal, state and local governments as everyone starts to talk to their tax preparers about 2020 tax returns.
Before we get into that, I want to point out that I am very optimistic that PPP funded expenses will end up being deductible. This is very important news for borrowers!
I’ve used the table below in previous blog posts. It continues to be a useful visual for where we stand on the taxability of the various programs.
Paycheck Protection Program (“PPP”) Loan
Loan forgiveness is not a taxable event. The accounting treatment for forgiven loan amounts will be to reduce the loan amount on the balance sheet and record a gain on extinguishment of debt on the income statement. If your loan is not forgiven until 2021, the debt will be moved to the P&L in 2021. Please notify Ceterus of the official forgiveness event obtained from your financial institution. Although this treatment will increase net income, there is no effect to your taxable income.
PPP funded expenses are still deemed taxable by the IRS as I type this post. There is a bill being discussed by Congress that has gained significant momentum in the past two weeks. This bill includes a provision that will make PPP funded expenses deductible.
I highlighted the non-taxable column in this section based on this positive news. Please keep in mind that until the bill is signed into law PPP funded expenses are taxable.
Emergency Injury Disaster Loan (EIDL)
EIDL loans are non-taxable as they are bonafide loans. Interest expense paid on these loans will be deductible, similar to any other loan.
EIDL Grant/Advances are considered to be a grant as they are not subject to repayment, forgiveness is automatic. The current tax treatment for the grant is to report it as taxable income.
Earlier in the year, there was thought that a business that had an EIDL Grant/Advance and a PPP loan may avoid having to treat the Grant/Advance as taxable income. This thought was floated because if you receive both, the EIDL Grant/Advance reduces PPP loan forgiveness dollar for dollar. Given what is known today, businesses with an EIDL Grant/Advance should assume these amounts will be taxable in 2020.
State & Local Programs
I highlighted the Taxable column in the table for this section. I want to call out the fact that most of these programs will be taxable income for businesses. Due to complexity and different rules based on tax structure, I strongly recommend you talk to your tax preparer about any amounts received from State and Local governments.