Many businesses have received federal relief grants and loans since the onset of the COVID-19 pandemic. Here’s how each one is handled when it comes to federal taxation.
COVID-19 EIDL Loan
Unlike some other relief programs, the COVID-19 Economic Impact Disaster Loan (EIDL) program is not forgivable. That means all borrowers must repay the principal and interest in full. Since the EIDL is a repayable loan, it is not considered income so it is not taxable.Typically, you can use the interest you pay on the loan as a business tax deduction.The same rule applies to non-COVID EIDLs for businesses in declared disaster areas. So if you’re battling COVID challenges as well as the aftermath of a hurricane, for instance, the tax treatment will be the same for more than one EIDL.
EIDL Advances
The EIDL Advances are grants and several have been issued. Currently, the Targeted EIDL Advance and the Supplemental Targeted EIDL Advance are available through December 31, 2021. The Advances are forgivable—they don't need to be repaid.EIDL Advances were designed to give small businesses immediate financial relief at the start of the pandemic and have now closed. However, Targeted Advances and Supplemental Targeted Advances, which are meant for businesses in low-income areas, are still available through the end of 2021. Eligible businesses could receive up to a total of $15,000 between the two Targeted Advances. Originally, Advance funds were supposed to be taxed. But the Consolidated Appropriations Act, enacted in December 2020, reversed this decision. So now, business owners do not have to report these forgivable funds as taxable income.
Paycheck Protection Program
The Paycheck Protection Program (PPP) gave businesses forgivable loans when the funds were used for qualifying expenses, including payroll. Applications for forgiveness are due 10 months after the covered period. But regardless of whether or not the funds end up being forgiven, PPP loans are not taxable. Additionally, expenses that were paid with PPP funds may still be claimed as tax deductions.
State Taxation of PPP Loan Funds
While the federal government has ruled not to tax PPP funds, some states have opted to collect tax on forgiven funds. As of July 2021, the following states plan to tax some or all of a business’s forgiven PPP funds. This list also includes states that may only tax certain types of businesses. Check your state’s revenue department for more details on what to expect.
States Taxing Forgiven PPP Funds
California
Florida
Nevada
North Carolina
Ohio
Rhode Island
Texas
Utah
Virginia
Washington
There are also state-by-state variations on whether or not expenses paid with forgiven PPP funds may be used as a tax deduction. Your CPA should also keep you updated on what to expect in terms of state taxation related to COVID relief measures.