Can You Be Taxed on Your PPP Loan?

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In their desperation to keep employees on payroll and remain afloat, many small business owners applied for the Payment Protection Program (PPP) without thinking twice. The benefits of this program are obvious: businesses that spend the majority of procured funds on payroll may qualify for complete loan forgiveness.

Now that PPP funds have been disbursed, some business owners are beginning to worry about the possible downsides of the program. Chief among these? Uncertainty surrounding taxation. Many applicants have no idea as to whether they’ll pay taxes on received funds — or if they’ll qualify for deductions.

Unfortunately, there are few clear answers as to how PPP funds will be treated during tax season. Still, in the interest of transparency, we’ve highlighted a few basic expectations:

The Importance of Rolling Conformity

The role of taxation in PPP funds largely depends on whether states adopt the CARES Act’s federal tax provisions. Some states maintain rolling conformity, in which they automatically adjust to the federal Internal Revenue Code (IRC) as soon as it’s amended. States such as Michigan, California, and Arizona, however, require specific legislation for IRC adoption. In these locations, the availability of PPP tax exemptions remains unclear. 

The PPP’s Impact on Deductions

While PPP funds are technically tax-free in most states, they can still have a detrimental impact on deductions. As Treasury Secretary Steve Mnuchin explains, “If the money that’s coming [in the PPP] is not taxable, you can’t double-dip. You can’t say you’re going to get deductions for workers that you didn’t pay for.”

As you determine your tax situation as it relates to PPP loans, feel free to seek guidance from the Highland Tax Group. We’re well aware of current tax concerns and ready to help you make the most of this evolving situation. Contact us for more information.