How are PPP & EIDL Accounted for on my Bookkeeping & Tax Preparation
Hey, folks. Kevin Molen with Molen and Associates here wanted to give you a quick update on how we are treating the payroll protection program, loans and grants and the economic injury disaster loans and grants. So a couple of folks had well, there was a lot of folks that had a lot of questions last year on how this was treated tax wise. Now we’re getting down to the nitty gritty and the actual filing of your tax return. The way that we account for this on the tax return is anything that was forgiven, any of the loans that were forgiven, like the payroll protection program loans, a vast majority of those were forgiven. And the economic injury, injury, disaster loans, a portion of that grant could have been forgiven as well.
This was hotly debated, whether this was going to be taxable and whether you could deduct the expenses. There was a lot of legislation in regards to this. There was a congressional letter of intent that was sent by several senators in 2020 to try and clarify. The IRS was being a little obstinate in regards to how this was being handled. Finally, at the tail end of 2020, there was some final very clear kind of legislation that cleared up the issue that made it so that the forgiveness was not income and that you could deduct the expenses of these that you use this money for.
So we got to have our cake and eat it, too. In that scenario. Now, the treatment of this for income tax purposes is we do actually need to report it. There are some states that will tax you on the forgiveness of this just because the federal government is not taxing you on the forgiveness. There are some certain states that are. So, number one, don’t make the mistake of thinking that it’s not relevant at all. It does matter, but you’ve got to be real careful with how you’re handling it, which is why you should engage a competent professional to do it. But the income shows up as what’s called other income, which is there’s a field for this to indicate that it is nontaxable. The funds, the assets are reported on your balance sheet. And, and then the expenses that you use the money for are taken off the top of your profit and are not. They are deductible and the income is not taxable. So again, it’s the best of both. So you receive $50,000 of a payroll protection loan. That payroll protection loan is used to pay your employees’ wages and you get to continue to deduct those wages as well as the employees receiving them. But money is fungible, which means now that money that you use to pay the payroll, you can use that money then elsewhere, which if it’s a deductible, business expense is still something that you can that you can write off the top of your income. So little complicated the way that works.
One thing I wanted to mention is you business owners out there, the ones who have these payroll protection loans and these economic injury disaster loans, especially the ones who received the forgiveness on these. Don’t forget that the business deadline is March the 15th. So coming up here real, real soon, it’s crucial that either you get your tax your business tax return filed by the deadline or that you file an extension. The extension itself is what’s called an automatic extension. The federal government gives it to you for free. You just have to ask for it. I will tell you that there is a penalty. That penalty is greater than $200 on a per partner or ownership basis per month that it is delinquent. So do not delay filing this tax return without securing an extension or if you can file timely. So that’s my my update in regards to the two different governmental loan programs from last year that are kind of a hot topic and reminding you business owners to make sure you get filed.