Are PPP loan proceeds taxable income on my tax return if my PPP loan was forgiven under COVID-19 relief?
No. Loan proceeds received under the Paycheck Protection Program (PPP) are not taxable income, regardless if the loan was forgiven or not. Forgiven PPP loans are not considered cancellation of debt income, and as such, you should not report these loan proceeds on your tax return. This applies to all taxpayers, whether your business is a sole proprietorship, single-member LLC, partnership, multi-member LLC, corporation, or any other entity type.
In the TaxAct program, you will not be asked to enter any PPP loan proceeds information. The IRS is not requiring nor requesting this information on tax returns. You should enter your gross receipts and other income items as you normally would.
Are expenses paid with PPP loan proceeds deductible on my tax return?
Yes. Expenses paid with PPP loan proceeds are deductible on your tax return, regardless if the loan was forgiven or not. With the passing of the Consolidated Appropriations Act of 2021, Congress made it clear that these expenses are deductible. Originally, the IRS ruled that expenses paid with forgiven PPP loan proceeds would not be deductible. After passage of the Consolidated Appropriations Act of 2021, the IRS issued Revenue Ruling 2021-2, which made obsolete prior rulings that these expenses were non-deductible.
Many taxpayers may see this as a "double dip" benefit, which is exactly what it is. Not only do taxpayers get tax free treatment of the forgiven PPP loan proceeds, but they are also allowed to deduct expenses paid with the loan proceeds. Some accounting professionals were somewhat surprised by this provision, but Congress stated that it was intended to maximize the benefits of those businesses hit the hardest by the COVID-19 pandemic.
In the TaxAct program, you should enter your expenses as you normally would. You will not be required to enter expenses paid with PPP loans, as the IRS is not requiring nor requesting this information.
Partnerships and corporations only - Should I report my PPP loan on my business’ balance sheet?
If you are required to complete Schedule L – Balance Sheet per Books, you can report your PPP loan balance on the balance sheet. The loan amount should be reported as liability. The loan balance could be reported as a nonrecourse loan or as a mortgage, note, or bond payable in one year or more, depending on how your business classifies the loan. It is important to note that PPP loans are 100% guaranteed by the federal government, which makes them nonrecourse debt. If your PPP loan was received and forgiven in the same tax year, the loan balance may not need to be reported on Schedule L.
If all or a portion of your PPP loan was forgiven, you may have recognized book income for financial accounting purposes. Because forgiven PPP loan proceeds are not considered taxable income on your Federal return, you would need to recognize a book-tax difference on Schedule M-1 – Reconciliation of Income (Loss) per Books With Income (Loss) per Return, if you are also required to file that schedule.
