PPP loans aren’t reported as taxable income, experts say
The claim: PPP loans must be reported on tax returns
It’s tax season, and thanks to the COVID-19 pandemic, thousands of businesses have a new type of loan to consider when filing.
the Paycheck Protection Program, a cornerstone of the CARES Act, provided loans to small businesses to help them stay afloat during the first year of the COVID-19 pandemic. But some social media posts imply that the loans come at a cost.
“PPP LOANS MUST BE DECLARED ON THE TAX RETURN,” reads one February 7 Facebook postshared over 350 times in four days. “Smh the GAME just changed.”
Commenters on the post had mixed reactions, with some interpreting the post as companies needing to recognize PPP loans on their tax returns and others questioning whether companies should report the money they withdrew as taxable income. .
“Report it however you want and if you don’t go (sic) to jail,” one commenter wrote.
Another commenter wrote: “If you have one, better include it with dem w2s.”
But experts told USA TODAY it’s not that simple. No loan should be reported as income because it is expected to be repaid. Although canceled or canceled loans are generally taxable, PPP loans are tax exempt at the federal level if used properly. However, some states may tax exempt PPP loans.
In response to USA TODAY’s request for comment, the post’s creator, Kristie Fuller, reiterated the claim made in the post and said her post was misunderstood by other social media users.
“A lot of people were in an uproar saying it was a misrepresentation, but I never said it was outside (sic) of the income you are declaring,” she said. .
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Loan proceeds are not included in taxable income
For those wondering if the PPP money they borrowed should be reported as taxable income, the answer is simple.
“The claim, as quoted, is false,” said Bryan Camp, a tax law professor at Texas Tech University, in an email. “As the Supreme Court explained in Commissioner v. Tufts, loans are never income when they are received because they are expected to be repaid. So if a taxpayer repays the PPP loan, there is nothing to report as income.”
Karen Brownprofessor of tax law at George Washington University, asserted this, writing in an email to USA TODAY that “loan proceeds are not included in income for federal income tax purposes. “.
The rules are a little different when loans are forgiven, as the canceled debt is usually taxable, depending on the Internal Revenue Service. But PPP loans are tax exempt whether or not the loan has been forgiven.
“The PPP was designed to allow taxpayers who properly used PPP loan proceeds – and were therefore released from the obligation to repay – not to have to report this discharge of debt as income,” Camp said. . “Conclusion: If the PPP loan was properly used and properly forgiven, the taxpayer need not report this forgiveness as gross income.”
Using at least 60% of PPP funds to payroll during the containment phase of the COVID-19 pandemic is considered “appropriate use”.
Whether the loan was repaid still needs to be reported, but the income itself is tax-exempt when used properly, Brown said.
Some States May Tax Exempt PPP Loans
A number of states may require income tax payments on canceled PPP loan amounts, despite the fact that the federal government will not.
For example, Nevada, Utah, North Carolina and Florida taxed all forgiven PPP loans in 2020, according to the nonprofit tax policy Tax Foundation. California, Rhode Island and Virginia taxed canceled PPP loans from certain companies, and Washington and Ohio taxed canceled PPP loans in certain cases.
The reason some states will tax canceled PPP loans while the federal government will not is because of state income tax laws, according to Forbes.
PolitiFact reported for the first time on the complaint.
USA TODAY has contacted the IRS for comment.
Our opinion: Missing context
Based on our research, we note MISSING CONTEXT the claim that PPP loans must be reported on tax returns, as without further context it could be misleading. Loans do not need to be reported as income when received, as they are expected to be repaid. PPP loans are tax-exempt at the federal level if used properly, but some states may exempt PPP loans from tax.
Our fact-checking sources:
- PolitiFact, February 10 PPP loans do not need to be reported as taxable income on tax returns
- Benefits.gov, May 27, 2020, Everything you need to know about the Paycheck Protection Program
- Bryan CampFebruary 11, email interview with USA TODAY
- Justia, retrieved February 11, Commissioner v. Tufts, 461 US 300 (1983)
- Karen BrownFebruary 11, email interview with USA TODAY
- IRS, updated January 11, Topic #431 Canceled debt – is it taxable or not?
- United States Department of Treasury, retrieved February 12 Paycheck Protection Program
- Forbes, May 3, 2021, Surprise! PPP loan exemption may not be tax-free for everyone
- Tax Foundation, February 22, 2021, Which states tax canceled PPP loans?
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