The new Paycheck Protection Program (PPP) that comes with the stimulus package can generate income for businesses that already have PPP money or had it at some point in the past.
PPP money comes in the form of a loan. It is because the person who gets the loan has to repay it. However, those are just the requirements. In practice, it isn’t exactly a loan.
Some businesses may not avail the loan because of the term “loan” associated with it. However, if they follow the correct procedures, they can have their loan 100% forgiven. This way, businesses don’t have to worry about repaying the loan. For them, it can be more like funds or a grant to help the business rather than a loan.
The forgiveness program applies to any business that availed PPP loans in the past or currently has one outstanding. Not only that, but it also applies to those looking to obtain the loan in the future. Therefore, it is beneficial for every business.
Given below are the details of the program.
The loan proceeds are tax-free
Businesses that apply for the loan forgiveness program don’t have to pay tax on the income. The COVID-related Tax Relief Act of 2020 states the forgiven loan is not taxable income for businesses.
The expenses funded with the forgiven amount are tax-deductible
Initially, the IRS did not consider any expenses paid with forgiven PPP loan to be tax-deductible. It created various issues for businesses used PPP loans to finance their expenses.
However, lawmakers changed the laws to compensate these businesses. Through the COVID-related Tax Relief Act of 2020, the federal government allowed any expenses paid with forgiven PPP loans to be tax-deductible.
The act overrides the position initially taken by the IRS. It states, “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided”.
The IRS also recognizes this law. Therefore, businesses that use funds from their forgiven PPP loans to pay for expenses don’t have to pay taxes. The change came in March 2020 when the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted.