Are you among the many businesses that received a PPP loan in 2020 to help your business get through the tough times? If so, now’s the time to learn how to handle the PPP loan and taxes.
The most recent legislation passed by the US government has made some great changes for those who received the PPP loan. It also clarified points around handling the PPP loan and taxes. Finally, we got some clarity from the government about PPP loans on tax returns and expenses paid with the loan. Woohoo!
Let’s dive in.
PPP Loan and Taxes
The simple version…
- the PPP loan is not treated as income on your tax return even once it’s been forgiven!
- any expenses paid for with the PPP loan funds can be treated as normal deductible business expenses!
Number 2 above is the best news since before the latest bill signed on December 27, 2020 any expenses paid for with PPP funds were not deductible.
If you’re a sole proprietor with no employees on payroll, then this probably won’t impact you one way or another. Since a sole proprietor doesn’t run payroll for the owner, the PPP loan proceeds were never taxable income nor is paying yourself ever a deductible expense. You simply take owner draws.
However, if you treat yourself like an S Corp or have payroll for employees as a sole proprietor (a single-member LLC is by default a sole proprietor for taxes), then this does apply to you and you should be paying attention. This is great news for you. Why?
Before the December bill was signed, any expenses paid for with PPP loan funds were not deductible. That’s right! You wouldn’t be able to deduct payroll, rent, utilities, etc. if they were paid for with PPP funds.
You received $20,000 as a PPP Loan. You then used those funds to pay salaries (yours and/or your employees) of $20,000. Before the December bill was signed that $20,000 was not deductible to your business. Let’s repeat that. The $20,000 for salaries paid with PPP funds was not eligible as a business deduction, expense or write-off.
Now that the bill has been signed, the $20,000 IS deductible. That’s the good part. You get the benefit of the PPP loan funds of $20,000 not counting as income AND the $20,000 for salaries now counts as a business deduction.
Seriously time to rejoice over that nice little addition to the December bill.
As far as the PPP loan and taxes, there’s nothing special to do. That’s good news for you.
However, I do recommend your PPP funds are recorded properly on your books. This is especially true if you use bookkeeping software, you are treated as an S Corp and/or you have employees that you pay. It’s really important to keep good records especially when extra items like the PPP loan and EIDL occur.
PPP and bookkeeping
It’s really important to understand how to record the PPP loan on your books. This way it doesn’t show up on your profit and loss or income statement as income.
If you received the PPP loan, then I suggest making sure it was put on the books as a loan. Why?
Because it truly is a forgivable loan from the SBA.
Here’s what that looks like using Quickbooks Online.
- Go to Accounting: chart of accounts.
- Create a new account. Type Long Term Liability or Other Current Liabilities. Name it PPP Loan or PPP funds.
- Make sure the deposit to your account went to that account vs. a sales or income account.
- You can check that the PPP loan is set up correctly by running your Balance Sheet report.
Many of you might never look at your balance sheet. However, it’s an important report to track since it lists your assets and liabilities.
Take a moment to look right now and see that it showed up on your business balance sheet.
In this example, you’ll see that this business also received an EIDL loan. Just like the PPP, any loan or liability should show up on the balance sheet. This helps you track any debt for the business.
Next up… you apply for forgiveness.
Applying for PPP forgiveness
The SBA took its time coming up with the forgiveness application. It now has 3! Yes. That’s right. There are 3 different forgiveness applications for PPP loans.
Why so many you ask?
Well, they are meant for different business types, loan amounts and all the variations in between.
For most of you, I’m guessing you’re either a sole proprietor (a single-member LLC qualifies as a sole proprietor) or possibly a single-owner S Corp.
As a sole proprietor, it’s pretty simple to apply for forgiveness as long as the bank that issued your PPP loan has its application ready to roll. Once it does, I suggest using the SBA 3508S if your PPP loan was under $50,000. It’s the simplest application available. You’ll need your business legal name, address, and other relevant information like your EIN or Social Security Number along with the following:
- SBA PPP loan number
- Lender PPP Loan number
- PPP Loan amount
- Disbursement date (date you received the funds)
- Employees at time of application and employees at time of forgiveness (most likely 1 for both)
- EIDL advance amount
- EIDL application number (if you applied for an EIDL loan in addition to the PPP Loan
- Forgiveness amount
- Your 2019 Schedule C (same item you used to apply for the loan)
I’m guessing most of you received less than $50,000 for your PPP loan. If you didn’t, then you can use the SBA checklist to see if the 3508 EZ application will work for you. It’s for those who didn’t reduce pay, employees, etc.
If you don’t qualify for the EZ application, then you’ll need to use the full forgiveness application, 3508. This one gets a little more complicated and requires more calculations. Don’t be afraid to ask for help if you fall into this category.
Once PPP loan forgiveness has been received, you’ll need to account for that on the books. The simplest way to do that is the create a journal entry. Many, if not most of you, might not have ever done this before. Have no fear, it’s easy enough.
In Quickbooks Online:
- Click the Plus + and under Other is Journal Entry.
- The date should match the date you received your forgiveness funds in your account. Alternatively, you could enter 12/31/2020.
- Under account type: PPP Loan (or whatever name you gave it)
- Debit the amount of the PPP funds.
- On the 2nd line for account, use Owner Draw (Owner Distributions).
- Credit the amount of the PPP loan to the owner draw line.
- You’re all set. If you check your balance sheet again, it should show zero balance for the PPP loan.
Hopefully, this cleared up any confusion over the PPP loan and taxes for you. If you still have questions, don’t hesitate to ask! I realize tax laws especially as it relates to the latest relief funds aren’t always easy to decipher.
Join the discussion and tell us your opinion.
Does this apply to s corps? Do I do shareholder draw? That might open up a different set of issues?
S corps can do owner distributions and the forgiven PPP funds do increase your basis in the S Corp. For an S Corp, the PPP funds should be used for payroll including to pay your salary.
Heather this is the best description of the process that I have seen. I am confused about the S corps and owner distributions. I thought it went directly to the Other Adjustments Account (OAA). I am a little confused but I will keep searching
With bookkeeping there usually is more than 1 way to note things. It does increase equity or basis in the business. On the tax return, it will not be treated as a distribution. It increases basis for an S Corp owner.