If you own a small business, regardless of the kind of business or its form, and have received, hope to receive, or know someone who has received funds from the Paycheck Protection Program (PPP), then this message applies to you.
The IRS released a notice (Notice 20-32) that outlines the use of PPP funds to have the loan convert into a non-taxable grant. The notice stipulates that you use the bulk of the funds to cover payroll and payroll-related expenses. The remainder can be used for operating expenses. If you follow these allocation guidelines, the loan will be considered non-taxable income, and the expenses you paid become non-deductible.
The exact allocation works out that at least 75% of the funds should go towards payroll-related expenses. The remainder can be used on items such as employee health care costs, rent, interest on existing loans, and retirement costs.
Please be aware that the PPP loan is designed to pay for expenses for the immediate 8 weeks subsequent to your PPP loan being funded by your bank.
Remember, this unprecedented federal business loan program will apply to your 2020 tax return. It makes sense to prepare now for what promises to be a confusing tax season in the winter of 2021. To avoid this confusion, we strongly suggest that you set up your income statement to track your expenses differently this year. Tracking your use of any PPP-related funds now will help make next year’s tax preparation process much more manageable.
Here is a sample of how you can modify your segregate your expenses to more accurately track any PPP money they receive and use.
- Ordinary Income
- Ordinary Expenses
- Net Income
- Other Income
- PPP Funds
- PPP Expenses
- Payroll Taxes
- Payroll Fees
- Retirement Related Expenses
- Employee Health Care Expenses
- Interest (on loans that existed prior to shut down)
- Net Other Income/Expense
This worksheet will help make any tax calculations without having to dig too deeply into your records, saving time and headaches.