This year’s tax season has the ability to get ugly if you’re not sure where to look for answers. With the constant changes throughout the last year within the PPP, the FFCRA, and the CARES Act, questions are starting to swirl about the accounting for loan forgiveness, and what’s involved with the possible tax credits or deferrals.
RASI Director of Compliance, Brian Smith, and Sydney Lynn, Director of Client Advisory Services, take a deep dive into Tax Season 2021 to untangle the web of stimulus legislation and outline everything you need to know to ensure your books are in tip-top shape.
WHAT’S COVERED UNDER ELIGIBLE NON-PAYROLL EXPENSES FOR PPP FORGIVENESS?
The Economic Aid Act, enacted December 27th, 2020 (Pub. L. 116-260) expanded the definition of nonpayroll expenses that are eligible for PPP forgiveness to include operations expenditures. The change in law is retroactive to PPP first draw if you have not applied for forgiveness. A covered operations expenditure is defined as a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
IS THERE ANYTHING SPECIAL ABOUT ACCOUNTING FOR THE PPP LOAN BEFORE IT IS FORGIVEN?
Before your PPP Loan is forgiven, there’s no difference in accounting from any other long-term loan. It’s recorded on the balance sheet.
WHAT IF MY LOAN IS NOT FORGIVEN AT THE END OF THE YEAR? DOES THIS IMPACT MY FEDERAL INCOME TAX RETURN?
If your loan isn’t forgiven at the end of the year, your federal income tax return would not be affected. The loan will be reported as a liability on the balance sheet, and there would be no income recorded from the forgiveness of your PPP loan at the end of 2020 because it hasn’t been forgiven (even if there was income it would be non-taxable), but the expenses that were paid with the PPP loan are still deductible in 2020.
HOW IS THE LOAN RECORDED ONCE IT IS FORGIVEN?
Forgiven debt is recorded as gain/income but in the case of PPP forgiven funds, the amount is non-taxable because of CARES Act.
ARE EXPENSES PAID WITH FORGIVEN PPP FUNDS DEDUCTIBLE ON MY FEDERAL INCOME TAX RETURN?
Expenses paid with forgiven PPP funds ARE deductible on your federal income tax return. COVID-related Tax Relief passed at the end of 2020 addressed this issue and made the change retroactive to the original effective date of the CARES Act, which was passed into law on March 27, 2020.
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IS THE ACCOUNTING FOR PPP SECOND DRAW GOING TO BE ANY DIFFERENT?
The accounting for PPP Second Draw will be handled the same as PPP First Draw. It will remain on the balance sheet as a loan until forgiven.
HOW IS THE EMPLOYER DEFERRED SOCIAL SECURITY ACCOUNTED FOR ON THE BALANCE SHEET?
The deferred employer social security is also a liability on the balance sheet, but it is recorded in a separate account from the employees’ social security, FICA and FWT that is paid after each payroll. Half of the deferred amount is due at the end of 2021 and the other half is due at the end of 2022.
WILL THE DEFERRED SOCIAL SECURITY IMPACT MY FEDERAL INCOME TAX RETURN?
The deferred social security could possibly impact your federal income tax return if a taxpayer is a tax basis taxpayer the deferred social security amount would reduce your payroll expense claimed on your federal income tax return . . . and this is because a cash basis taxpayer cannot claim an expense until it is actually paid.