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Particulars |
PPP Loan |
EIDL Loan |
Employee Retention Credit |
| Tax effects | The CARES Act spells out that the forgiven loan amount won’t be included in taxable income. That means you don’t pay taxes on the money that you receive. This notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.” | The EIDL advance is technically a grant for small businesses of up to $10,000. Because it’s a grant, it’s not part of the loan that needs to be repaid. That means it’s going to be treated differently than a loan on your financial statements and your tax return at the end of the year. This grant will probably need to be included in taxable income. This isn’t definitive because the IRS hasn’t specifically said that this advance should be included in taxable income, but previously they’ve been pretty clear that any forgiven SBA loan amounts need to be included in income. The catch is that if you receive an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount. For example, if you received a $10,000 EIDL advance and $75,000 PPP loan, the maximum amount that would be eligible for forgiveness is $65,000. You will need to make a decision on what to do with that money - whether to return it or convert into a loan. | Employee Retention Credit is eligible for business with fewer than 500 employees who either suspended or partially suspended their business due to COVID-19 because of a government order or they experienced a 50% decline in gross receipts when compared with the same quarter in the previous year. The catch is that you can’t have a PPP Loan and receive the Employee Retention Credit. |
| Put simply: Tax effects | If the forgiven loan isn’t included in a business’s taxable income, the expenses paid for with the forgiven loan aren’t able to be included as a tax deduction. That may sound like a small detail, but it can potentially have a big impact on your final tax bill at the end of the year. | If you received an EIDL advance for the maximum amount of $10,000, that money will need to be added to your taxable income at the end of the year. But if it’s added to your taxable income, you’ll be able to deduct any expenses that you use to pay for this grant. | Tax credits are incredibly valuable because unlike a deduction, which reduces your taxable income, tax credits reduce your tax liability on a dollar for dollar basis. |
| Examples | Let’s say your business is a C corporation that received $100,000 in a PPP loan. You used that money entirely on payroll expenses and qualified for loan forgiveness. The $100,000 that you receive won’t be included in taxable income at the end of the year. But you won’t get a $100,000 tax deduction for the expenses you incurred. That means you could have an extra $21,000 tax liability at the end of the year ($100,000 * 21% corporate tax rate) that you wouldn’t have if you were allowed to take the deductions as normal. | Let’s say you received an EIDL advance of $10,000. You’ll increase your taxable income for the year by that amount. But you also used all of that money to pay for some of your business expenses, like inventory and rent. You’ll get to take that $10,000 that you spent as a deduction against your taxable income, which means you won’t pay taxes on the money you received. | If you have a $10,000 tax liability and a $3,000 tax credit, the amount of tax you owe is now $7,000. The credit is calculated per employee and is 50% of up to $10,000 in qualified wages paid per quarter. If you qualify for the credit and paid three employees $8,000 in qualified wages during a quarter, you’d be eligible for a credit of $12,000. |
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