Get ready to pay it back or pay the taxman.

Many small businesses impacted by the coronavirus pandemic were eligible to apply for a loan through the Payroll Protection Program (PPP). These loans were essential for helping to keep employees working and businesses open. You’ve probably heard a lot in the media as to what the loan proceeds can be used for and whether they need to be repaid.

In general, 100% of the loan can be forgiven—if you meet certain criteria. First and foremost, to get your loan forgiven, you’ll need to complete a PPP loan forgiveness application form and submit it to your lender. You can obtain the necessary form (Form 3508 or Form 3508-EZ) from the Small Business Administration at sba.gov.

Secondly, you must use the funds from the loan for certain expenses. The funds from the PPP can be used for the following:

  • Payroll (salary, wage, vacation, parental, family, medical or sick leave, health benefits)
  • Mortgage interest, if the mortgage was signed before Feb. 15, 2020
  • Rent, if the lease agreement was in effect before Feb. 15, 2020 (rent includes rental of office space business equipment, vehicles or warehouse)
  • Utilities, if service began before Feb. 15, 2020 (utilities include electricity, water, gas, sewage, cell phone/landline, internet and transportation costs)

Eligible expenses are those that are incurred over 24 weeks, starting from the day the first payment was made by your lender. This is not necessarily the date on which you signed your loan agreement. At least 60% of the loan proceeds must be used to cover payroll costs. The remaining 40% can be used for other costs.

While all this seems straightforward, there are several other conditions of forgiveness that are dependent on how many employees you retain and how much you pay them. It’s advisable that you seek assistance before attempting to tackle this on your own.

At the time of writing, any forgiveness will not be considered as taxable income, however any expenses incurred that are related to the amount forgiven will not be deductible (bullet points previously mentioned). The net effect is that any amount forgiven will be taxable income, and it will be taxable in tax year 2020 regardless of if forgiveness is confirmed before December 31, 2020 or not.

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