Pandemic relief legislation has been a maze of acronyms and provisions leaving many business owners wondering what they were eligible for, what they should take advantage of, and what tax implications they were signing up for.

Congress has not made the job any easier by changing the rules. For example, originally companies that took advantage of the Paycheck Protection Program (PPP) were not allowed to deduct expenses that were paid for with PPP funds.

The Consolidated Appropriations Act (CAA) that was signed into law at the end of 2020 changed these provisions. More specifically, Section 276 of the Act allows businesses to deduct expenses that are paid with forgiven PPP loan funds. This section also states that no basis increase shall be denied due to the exclusion of forgiven PPP loan funds from gross income. A tax-exempt income event usually creates basis.

According to Section 276, S corps and partnerships should treat the exclusion of forgiven PPP loan funds from gross income as tax-exempt income for tax reporting purposes. Shareholders and partners will increase their tax basis in the S corp or partnership based on their share of the tax-exempt income.

Things can get complicated when you consider that the period in which qualifying expenses were paid does not necessarily coincide with the period for obtaining PPP loan forgiveness. The proper period for the inclusion of tax-exempt income is when the borrower pays or incurs qualifying expenses during the covered forgiveness period.

From high demand to labor and materials shortages, business owners have a lot on their plate. If your company took advantage of the PPP, it makes sense to let an accounting professional handle the tax implications as well as assist in the loan forgiveness process. You don’t want to find out at a Small Business Administration review that it was done incorrectly.

Dembo Jones experts have been helping our clients navigate business disruptions of the pandemic, including offering advice on how to take advantage of relief programs as well as how to properly manage the tax implications and loan forgiveness options. No matter where you are in the process, contact us today and enlist a thoughtful partner eager to maximize your business’ post-pandemic success.