February 19, 2021
IRS Reporting of Economic Impact Payments and PPP Loan Proceeds
by Matthew Porter, Esq., Porter Law Office, LLC
Along with 160 million other Americans, you probably received an economic impact payment, also referred to as a stimulus check, or EIP. If you own a business, you may have also received a loan under the popular Paycheck Protection Program. With the 2020 tax filing season opening on Feb. 12, you may be wondering if you are going to be paying more this year in taxes. Fortunately—this is not hyperbole—both programs result in remarkable, rare or just plain mind-boggling tax results. Here’s why.
EIPs are an advanced refundable tax credit
The CARES Act signed into law on March 27, 2020 authorized the Internal Revenue Service to issue EIPs to eligible individuals. The IRS has been delivering a second round of EIPs as part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 to millions of Americans who received the first round of payments in 2020. And a third round may be forthcoming.
A basic feature of the EIP is that it does not create taxable income. It will not reduce any refund you might receive. It will not increase the amount of tax you might owe. It is a relatively rare tax credit because it is both advanced and refundable. A standard non-refundable tax credit reduces income taxes dollar-for-dollar, but it cannot trigger a refund. A refundable tax credit can trigger a tax refund. Think of the EITC. For example, if you owe $1,000 in tax, and you claim a $1,500 refundable tax credit, you will get a $500 tax refund. The caveat: you need to file a tax return to claim the tax credit. No so with the EIP.
The EIP is an advanced, refundable tax credit. Technically called the Recovery Rebate Credit, it allows for the tax credit to be paid before the tax return has even been filed. What if your income is expected to increase in 2021, meaning you don’t qualify for the full amount of the EIP? Do you have to pay it back? Short answer, no. What if you received a portion of the EIP in 2020, but your income will drop below the threshold to receive the full amount? Fortunately, you can claim the difference on your 2020 tax return. So don’t worry. You will not owe the IRS if you received more than you qualify for. And if you received less, you can get the rest when you file.
PPP loan proceeds, expenses, and forgiveness all tax favorable
The CARES Act also created the emergency PPP loan program. The SBA guidance on the PPP has been changed and amended several times, leaving businesses understandably confused.
The PPP loan has numerous tax benefits. First, PPP loan proceeds are not taxable income. Second, the loan can be forgiven so long as the funds were spent properly (on things like payroll expenses, mortgage interest, utilities, etc.). The CARES Act is clear that the forgiven loan will not be taxable on your 2020 return. And, the IRS recently relieved businesses and other taxpayers from filing information returns reporting PPP loan forgiveness (typically filed on a 1099-C). All good news.
But wait, there’s more. For most of 2020, there was a lingering question as to whether businesses could deduct expenses paid with the PPP loan proceeds. Thanks to the Consolidated Appropriations Act of 2021, signed into law on Dec. 27, 2020, it is now clear that business expenses paid with PPP loan proceeds are tax-deductible.