Updated: Jan 22, 2021
You got a PPP loan, so now what?
When you applied for the loan, you were probably informed of the expense that the loan could be used to pay for; if not, see below:
Covered operations expenses:
Payment for any business software or cloud computing service that facilitates any of the following:
Product or service delivery
Processing, payment, or tracking of payroll expenses
Sales and billing functions
Accounting or tracking of supplies, inventory, records, and expenses
Covered property damage costs: Costs related to property damage due to public disturbances during 2020 are not covered by insurance.
Covered supplier costs: Amounts paid to suppliers made according to a contract, purchase order, or order for goods in effect before taking out the loan.
Covered worker protection expenses: Expenses to help your business comply with federal health and safety guidelines or any equivalent state and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration. These include, but are not limited to, the purchase, maintenance, or renovation of assets that create or expand:
A drive-through window facility
An indoor, outdoor, or combined air or air pressure ventilation or filtration system
A physical barrier such as a sneeze guard
An expansion of additional indoor, outdoor, or combined business space
An onsite or offsite health screening capability
Other assets necessary to comply with various regulatory agency requirements.
So you spent the money and want forgiveness.
If your loan was under $150,000, you might be eligible to apply for forgiveness using a simplified application. All you need to do is submit a one-page application that includes the following:
A description of the number of employees you were able to retain because of the covered loan
An estimated amount of the loan amount spent on payroll costs
The total loan amount
An attestation that you accurately provided the required certification for the loan and complied with the PPP loan requirements.
If you are self-employed, you may be eligible to use an EZ forgiveness application if you do not qualify for the simplified version above.
So, your loan has been forgiven, or you have submitted the forgiveness application to your lender, now what?
You will want to reduce your related expenses by the amount of loan forgiveness you received (if you applied for and received forgiveness in 2020) or by the estimated/anticipated loan forgiveness. Since the loan forgiveness is not taxable, you cannot get the benefit of the deductions (this also applies to CA taxes, please check with your preparer for your specific state).
What happens if you did not apply for forgiveness until 2021 and reduce your expenses by the anticipated forgiveness amount and then later find out that the loan will not be forgiven or the amount forgiven does not match your estimate? In this case, you will need to either amend your 2020 tax return to take the deduction for the disallowed forgiveness amount or you can include the deduction on your 2021 tax return. Please check with your tax expert to determine what works best for your situation.
As with all things tax-related, you should keep all related documents for a minimum of 3 years or longer depending on your company policies or advice received from your tax preparer. As it stands, the IRS does not require lenders to submit a 1099-C for the loan forgiveness or any informational returns, so you may not get tax documents.