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Are Business Expenses Paid With PPP Loans Deductible?

5 min read • Jan 25, 2021 • Lendio

UPDATE: The PPP loan application period ended May 31, 2021. Learn about financing options available for small businesses today at Lendio.com

 

Since the Paycheck Protection Program (PPP) was first launched, millions of small businesses have rushed to apply in hopes of receiving government funding to sustain their companies through the ongoing pandemic. Despite this intense popularity, there is still a lot of uncertainty around PPP loans. From the application and funding process to repayment and loan-conversion, small business owners are striving to better understand the details of the Paycheck Protection Program. 

One common question that forward-thinking small business owners ask about PPP loans pertains to taxes: Is my PPP loan tax-deductible?

The short answer is yes, they are! The Economic Aid Act clarified that all business expenses paid with PPP loans are now tax deductible. We are awaiting further IRS guidance on this to fully understand how the process will work.

In the meantime, you will need to carefully track all your expenses so that you’ll be prepared to claim these deductions when the time arrives. You should already be categorizing your PPP loan expenses into 2 categories in order to receive forgiveness. The SBA refers to them as “payroll costs” and “other business expenses.”

Let’s look a little closer at what these categories include:

Payroll Costs

This category has a name that instantly conjures images of paychecks, but it’s so much more than that. Approved expenses within the payroll category include:

  • Compensation in the form of salaries, wages, commissions, or similar compensation up to $100,000
  • Payment of cash tips or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment of retirement benefits
  • Group vision, dental, disability, or life insurance
  • Payment of state or local taxes assessed on the compensation of employees

According to the forgiveness rules laid out by the SBA, you must use a minimum of 60% of your PPP loan funds on payroll costs. If there are reductions to your employee salaries, the amount you can have forgiven may be affected. For example, a reduction of 25% or more in annual salary for employees who make less than $100,000 a year will result in a smaller forgiveness amount.

Other Business Expenses

While the name of the payroll costs category might make it sound more narrow than it actually is, the opposite is true for this second category. The words “other business expenses” sound about as broad as you can imagine, implying this category is some sort of catch-all. But the SBA has provided a list of qualified expenses, and while the rules include many helpful uses for the money, this category certainly isn’t intended for “everything other than payroll.”

Here’s a breakdown of the approved expenses:

  • Healthcare costs related to the continuation of group healthcare benefits during periods of sick, medical, or family leave, as well as insurance premiums.
  • Mortgage interest payments (but not prepayment or payment of the mortgage principal)
  • Rent
  • Utilities
  • Interest on any other debt obligations incurred before February 15, 2020
  • Refinancing an SBA EIDL received between January 31, 2020, and April 3, 2020
  • Covered expenditures such as business software or cloud computing services that facilitate:
    • business operations
    • product or service delivery
    • the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions
    • accounting or tracking of supplies, inventory, records, or expenses
  • Covered property damage costs
  • Covered supplier costs
  • Covered worker protection expenditures

As you can see, many of your business’s operating costs are eligible for forgiveness. Just make sure that you track everything and keep your records straight so that you can submit the proper documentation when it’s required.

Are PPP Loans Taxable?

Whether or not you can claim deductions on expenses financed with loan funds is a totally different ball game from the taxability of the loans themselves. So is a PPP loan taxable? 

PPP loans will not be taxed at a federal level, but some states have chosen to include the loans as taxable income. You should check with your state to see whether or not you’ll be required to pay state taxes on the loan.

Enlisting the Help of Bookkeeping Experts

As a business owner, you already have a million things on your plate. You can free up precious time by delegating your bookkeeping to a bookkeeping service that will improve accuracy and save you money. For example, Sunrise offers a free online bookkeeping tool that will help you stay on top of your expenses so you can ensure you’re adhering to the SBA’s expense rules for PPP loans.

Once you’ve linked your credit cards and business bank account, your expenses and income are automatically categorized. That’s right—you no longer need to dig through receipts and stress over the specific elements of your daily expenditures.

Tax season definitely loses some of its sting when you have bookkeeping support. You’ll be more prepared for your annual filings, as your ultra-organized finances make it easier to deduct qualified business expenses paid with your PPP loan. The ancillary benefit is that your careful tracking will also aid your efforts to get the biggest portion of your loan forgiven.

 

The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

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