Despite the pandemic’s economic impact, many businesses were able to remain open due to the Paycheck Protection Program (PPP). However, organizations that benefitted from PPP loans need to determine whether they fulfilled loan forgiveness requirements or must begin repayment.
Since the program’s inception last March, governmental funds have been made available to keep entities afloat. Those who spent the money according to the loan’s stipulations are free from reimbursement obligations. However, one must understand which expenses qualify.
Approved expenses for loan forgiveness
In the first draw, loan forgiveness required businesses that utilized the PPP to show they allocated a minimum of 60% of received funds to payroll expenses. Generally speaking, this included compensation up to $46,154 for each employee, in the form of:
- Earned income
- Paid time off
- Severance agreements
- Applicable payroll taxes
- Retirement plan contributions
- Health insurance benefits
As such, forgiveness amounts could vary if non-payroll costs, such as those for real property or utility payments, exceeded 40% of qualifying expenses. The second draw, launched last month, expanded forgivable expenses to include costs related to providing worker protection, operations and property damage.
So, what kind of financial implications might businesses anticipate?
Business responsibility, regardless of whether loans become grants
Thankfully, forgiven PPP loans are tax-exempt. Additionally, the legal option to write off business expenses doesn’t depend on the source of money used to pay the bills.
There is also flexibility available in repaying deferred payroll taxes. Though, a business may not apply borrowed money to its tax bill.
Perhaps now more than ever, rights are as important as responsibilities when filing a tax return. An accurate accounting of PPP allocations may help minimize tax implications. That way, businesses can reinvest money into necessary growth strategies for more profitable years to come.