How the Paycheck Protection Program Affects 2020 Taxes

By

Brett Wheatley

-

Reviewed by

Tim Petty, CPA

on

February 1, 2021

This article is Tax Professional approved

Group

If you received a paycheck protection program (PPP) loan in 2020, it may be time to start thinking about how this will impact your 2020 taxes.

The PPP loan is unique because if you use the funds in a certain way, your entire loan can be completely forgiven. To get your PPP loan forgiven you have to apply for loan forgiveness through your PPP lender. For a refresher on the forgiveness process you can check out our dedicated guide to PPP loan forgiveness.

What's Bench?

Online bookkeeping and tax filing powered by real humans.
Learn more
Friends don’t let friends do their own bookkeeping. Share this article.

Contents

Tired of doing your own books?
Try Bench

Unfortunately, the PPP forgiveness processing times are longer than expected. Many borrowers will not receive a decision on their forgiveness application until after their 2020 tax deadline. The aim of this loan is to provide businesses with the money they need to keep running and continue paying employees—not to create a tax burden for businesses receiving the funds.

Read on to learn exactly how your PPP loan could impact your 2020 tax filing.

Will my forgiven PPP loan amount be taxable income?

The CARES Act spells out that the PPP loan amount is not included in the borrower’s taxable income. That means you don’t pay taxes on the PPP money you receive. This applies if you haven’t applied for forgiveness yet, are waiting on your forgiveness decision, or have received forgiveness on a portion or 100% of your PPP loan. No matter where you are in the forgiveness process, your forgiven loan is not taxable income meaning you do not include it on your 2020 tax return.

Will my owner compensation replacement amount be taxable income?

It’s unclear whether how owner compensation replacement (OCR) will be treated. For partnerships, owner compensation replacement is paid out through guaranteed payments reported on each partner’s Schedule K-1. These payments are taxable on each partner’s personal income tax return.

But for sole proprietors, their personal income tax return is their business tax return. If they take OCR, it might not be considered taxable income because the business isn’t technically paying the business owner their OCR.

If you are taking OCR from your business, check in with your CPA or tax professional for the best way to handle it given your business structure.

Will expenses covered by a PPP loan be tax deductible?

Previously the IRS stated expenses covered by a PPP loan would not be tax deductible.

But on December 22, 2020, a bill was passed that clarified these expenses will be tax deductible. Businesses can now claim all expenses covered by a PPP loan on their 2020 tax return.

What about the PPP recordkeeping requirements?

Receiving a PPP loan no longer affects your taxes. But this doesn’t mean you can let your recordkeeping slide.

Good recordkeeping and bookkeeping is critical for getting your loan forgiven. It’s important to stay on top of how you use your PPP funds as you use them. Make sure you are logging each transaction and collecting any corresponding document. At Bench, we can automate tracking your transactions and provide you a platform to upload your documents for safekeeping. Learn more about how Bench can help with the PPP and more.

Your business also needs to have complete financial statements at the end of your fiscal year. Your lender and the SBA have the right to request and audit your business’s financial documents and records for up to 6 years after the loan has been forgiven or repaid. Penalties may include imprisonment or fines.

Further reading: PPP Audits: What You Need to Know

Additional resources


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
Friends don’t let friends do their own bookkeeping. Share this article.

Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances

Get a regular dose of educational guides and resources curated from the experts at Bench to help you confidently make the right decisions to grow your business. No spam. Unsubscribe at any time.