Businesses backed by coronavirus relief funding could face a new wave of uncertainty this tax-reporting season as rules about how that money should be reported on federal and state income taxes keep changing.
Congress has created coronavirus relief programs like the Paycheck Protection Program and the tax-exempt Shuttered Venue Operators Grant, while allowing businesses to deduct business expenses paid with funds they received, creating two levels of tax relief for struggling businesses.
But not all states have followed suit — and many have been inconsistent with the tax treatment of COVID-19 funding at the state level — confusing business owners.
Here’s how different types of COVID Relief Funding can affect your 2021 business taxes. When in doubt, consult a tax professional to decode any changes or nuances in your state’s tax code.
Paycheck Protection Program
Canceled PPP loans are not taxable income as far as the IRS is concerned. And expenses that would normally be deductible are still deductible, even when paid for with a PPP loan. But some states deviate from the federal code on one or more of these points.
In Utah, for example, canceled PPP loans are considered taxable income on state returns. And in California, only private businesses that have experienced a 25% drop in gross revenue can deduct expenses paid with a PPP loan.
Other states have changed their tax treatment of PPP loans and expenses in 2021, which means businesses may have to file modified returns.
COVID-19 Economic Disaster Loans
Funds loaned through the Small Business Administration EIDL Program aren’t taxed as income, says Armine Alajian, a chartered accountant and founder of The Alajian Group, an accounting firm with offices in Los Angeles and New York.
“EIDL loans are pure loans repaid in 30 years at 3.75% interest. It’s not taxable because it’s not income, it’s a loan to be repaid,” says Alaijan. “The payments are also not tax deductible.”
Businesses that have received a Targeted or Supplemental EIDL Advance also do not need to report those funds as income for federal tax purposes. Although these funds are technically grants, they are excluded from taxable income.
State and Federal COVID Grants
Grants are generally treated as income on business tax returns. That’s not the case with two large-scale federal COVID grants: the Closed Venue Operator Grant and the Restaurant Revitalization Fund.
Money received through either program is not taxed as income on federal returns, and you can deduct expenses paid with your grant money. You may need to report these funds on your state taxes, as some states do not align with the federal government on this.
State subsidies are another story. These funds are often considered income on state and federal returns, but some states have made exceptions for COVID relief grants.
If you’re unclear about your state’s rules, check your tax documents and consult a tax professional, says Talibah Bayles, founder and CEO of TMB Tax & Financial Services, based in Birmingham, Alabama.
“Be very intentional when reviewing all 1099s you receive through a grant,” says Bayles. This form will indicate if the grant is taxable. “If you have a 1099 and it’s taxable, talk to a tax professional. What were the program requirements? Are there any nuances at the state level that would allow you to treat it as non-taxable at the federal level?
Employee retention credit
Employee Retention Credit has gone through several iterations over the past two years, causing headaches and heartburn for many small business owners.
Originally, business owners couldn’t double down on PPP and ERC. This was later changed, retroactively, so that businesses that took out a PPP loan could claim the tax credit, but not on wages already covered by their PPP loan.
The credit amount has also changed. Companies could be eligible for up to $5,000 per employee for salaries paid between March 12, 2020 and the end of 2021. This figure has increased to $7,000 per employee, per quarter, for salaries paid from January 1 as of September 30, 2021, making it a much more attractive option for small business owners.
“I think it’s a gem for business owners,” Bayles says. “It’s a great opportunity to try and have a positive impact on your cash flow.”
The problem: Most small businesses don’t have payroll.
“Especially your solopreneurs or even single member LLCs,” she says. “Most business owners either don’t have a formal payroll or don’t have a formal payroll themselves, so that still leaves out a group of people he intended to help. “
Companies that qualify and wish to benefit retroactively from the changes to the ERC will need to amend previous years’ tax returns to reduce the payroll charges that come with them.
“You must reduce expenses for the year in which you claim [the credit], not the year you receive it,” says Ryan Losi, CPA and executive vice president of Piascik, an accounting firm headquartered near Richmond, Virginia. “The IRS says some [ERC] claims will take a year to process.
This means that business owners must amend personal and business statements from the previous year without having cash on hand — and on their books — from credit.
The article How COVID Grants, Relief Programs Impact 2021 Business Taxes originally appeared on NerdWallet.