Of all the measures taken by the Federal government to address the economic impact of the COVID-19 pandemic, the Paycheck Protection Program (PPP) probably received the most attention. With many small businesses forced to shut their doors – at least temporarily – millions of employees were left without a source of income. The PPP disbursements were intended to inject the economy with cash to mitigate the worst effects of these closures, essentially substituting cash infusions from the government for the lost revenue. As the name of the program suggested, that money was intended chiefly to cover or replace the wages of affected workers.
Even though PPP funds were intended to offset lost revenue, that money is not being characterized as revenue from a tax standpoint. It was distributed as a loan, with many companies then able to obtain forgiveness of the loan. Regardless of whether you received loan forgiveness or expect to, the money does not count as revenue.
Nonetheless, you can still claim the Employee Retention Tax Credit (ERTC) and apply that to your filing even if you received PPP money. However, some earnings are NOT allowed:
Earnings paid with PPP funds that are ultimately forgiven
Payments through the Emergency Medical Leave Act
Work Opportunity Tax credits
While this is a valuable tool to inject much-needed cash back into your business, especially since you can apply the credit retroactively for 2020, it is important to understand that the tax credit received will reduce the tax-deductibility of those wages as a business expense.
This only scratches the surface of the many aspects of coronavirus economic relief packages. The US Treasury Department has a wealth of information that you’ll want to review.
DISCLAIMER: this piece is not intended to serve as tax advice; always consult with a tax professional when filing your returns.