Editor’s Note: This article was updated on 2.2.2021.
What was the CARES Act?
When COVID-19 really hit the United States at the beginning of March, it brought with it more challenges than most people have faced in their living history. Beyond the obvious consequences of sickness, death, and desperately overrun hospitals in hardest hit places, like New York, the pandemic brought a unique set of economic challenges, as people were urged to stay inside, and industries centered around in-person interaction, such as restaurants and entertainment, were forced to lay off workers by the hundreds, while small to midsize businesses struggled to stay afloat.
To try and soften the blow of these economic challenges and make social distancing more possible for individuals, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March. Some key points of the CARES Act included: a stimulus check consisting of a one-time payment of $1200 to individuals making less than $75,000 per year, with married couples eligible to receive $3400 if they are each entitled to a check, and families with children eligible for an extra $500 per child, the Paycheck Protection Program (PPP), which allowed small businesses to apply for a special loan to help them survive through this time, and a new payroll tax credit credit, allowing employers to take out a tax credit to refund up to $10,000 of wages paid during the crisis. This article will explore the CARES Act, specifically focusing on the effect that all of these new measures will have on taxpayers in the upcoming 2020 tax season.
How Will a PPP Loan Affect my Taxes?
The Paycheck Protection Program (PPP) is a government set up safety net to help small businesses survive the COVID-19 pandemic. This safety net came in the form of a government-extended loan, called a PPP loan, which was intended to provide enough cash flow to last a small business about eight weeks. Another upside of this loan is that it’s eligible to be forgiven, making it essentially free money from the government. Loan forgiveness, however, is a bit more complicated than it might appear, and it depends on whether or not the government can ensure that you spend the money on payroll, business related rent, utilities, and other essential business expenses. Most of the money should have gone towards payroll. There also is a form you need to fill out to apply to get your PPP loan forgiven. This form tells the government where the money was allocated and helps them to make the decision about whether or not your loan should be forgiven.
Of course, even if your loan is forgiven, there have been questions about how the PPP loan will affect your taxes in the 2020 tax season. Good news! The forgiven loan amount won’t be included in your taxable income. There was also a question about whether or not those who used PPP loads to cover deductible expenses would still be able to deduct those expenses. Congress has since clarified in the Covid-related Tax Relief Act of 2020 (COVIDTRA) that expenses paid for with forgiven PPP loans would be tax deductible.
What about an EIDL Loan?
Another CARES Act loan option to be aware is the Economic Injury Disaster Loan (EIDL). This loan is available to businesses who have proof that they have been specifically affected by COVID-19 and have suffered significant economic consequences. Independent contractors and self-employed people may also apply for this loan. Originally, businesses and contractors could apply for up to two million dollars, however, that cap has since been pushed down to $150,000 as the demand for it became so high that a two million dollar cap no longer seemed feasible.
In terms of loan forgiveness, the EIDL allows an advance of up to $10,000 to be forgiven, however, the loan itself will generally not be forgiven and you will be expected to pay back everything that you borrowed above that ten thousand dollar amount. The amount of the loan that is considered “advance” also varies. It’s determined by how many employees are covered by the loan, $1000 per employee, up to $10,000. This, of course, also comes with a few caveats, for example, the advance will only be forgiven if used for certain permitted purposes, which include: paid leave, payroll, increased material cost, rent payments, and other financial obligations that had to slip through the cracks because of the impact of the pandemic. You cannot, however, use the loan to expand your business, pay back past debt, or replace lost profit. If you do use the loan for any of these non-permitted purposes, you will not only lose your chance at advance forgiveness, but you may also have to pay back the loan immediately.
There is no special tax treatment for most of this loan, so the only new issue affecting taxpayers in 2020 will be the treatment of the advance portion. COVIDTRA clarified that the EIDL would not be counted as income and otherwise deductible expenses funded by it would still be deductible.
Treatment of the Payroll Tax Credit
A tax credit is a dollar for dollar reduction of your overall tax bill and is a way that the government helps to incentivize business owners. The R&D Credit, for example, is a government incentive for innovation. The Payroll Tax Credit is a government incentive for keeping people employed during the pandemic. If you’ve already benefited from a PPP loan, however, you need not worry about this one. Since the PPP was already designed to cover payroll expenses, you can’t benefit from both at the same time. Otherwise, if you’re an employer whose gross receipts dropped by 50% or more over the course of the year or an employer who had to stop operations due to government regulated social distancing measures, this might be a credit to look at for you.
The credit itself is actually fairly generous. If a company has more than 100 employers, this credit is set to cover up to 50% of wages to an employee who is currently not working due to COVID-19. This caps at $10,000 in wages per employee, or $5,000 in tax credit per employee. If a business has fewer than 100 employees, the amount of credit is the same, however, it can be applied to all employees, including individuals who continue to work through the pandemic.
The Bottom Line
If you’re a business owner right now, chances are your business has been impacted one way or another, you’ve likely even taken out one of these loan options. If so, it’s important to understand how these features of the CARES Act will impact you this tax season. If you have any questions, or would like to start looking at your tax plan, don’t hesitate to visit our website and set up a complimentary call with one of our tax planning specialists.