Tax season is upon us, and for contractors that borrowed money under the federal government's Paycheck Protection Program last year in order to help their businesses survive the economic hardships presented by the COVID-19 pandemic, there are a few issues worth noting.
The biggest impact to their 2020 corporate tax returns filed this year will be that, after a lot of back and forth, those receiving forgiveness for the loans will be able to deduct the expenses allowed under the program.
This is good news for loan recipients since deductibility was up in the air until the end of last year, said Michael Ceschini, managing member at Ceschini CPAs Tax & Advisory in New York. The loans are forgivable if at least 60% of the proceeds are spent on payroll costs and the remaining 40% on outlays for rent, utilities and other approved items.
Payroll expenses in particular are a big-ticket item for most contractors and not being able to deduct them would have put some at risk for higher-than-expected tax bills.
As far as the loan itself, said Carl Oliveri, partner and construction practice leader at the accounting firm Grassi & Co., contractors will be able to account for it two primary ways.
"If a contractor is pretty certain they're going to get forgiveness, they're going to drop it into income because it's going to make the financial statements look a little better. Then on their tax return, you're going to see it as a reconciling item, taking their income from their financial statements down to a lower taxable number," he said.
Between the deductibility and forgiveness of the PPP loan itself, contractors' income could be reduced to the point where they can claim a loss, Oliveri said.
However, Grassi is advising its clients to treat PPP loans as they would any other loans — liabilities — until they receive formal forgiveness from the Small Business Administration, which oversees the program.
Also treated as a liability, Oliveri said, will be deferred FICA payments, the business's contributions to each employee's Social Security account. As part of the CARES Act, employers can defer those payments due between March 27, 2020, and Dec. 31, 2020. Employers must pay 50% of deferred FICA payments by Dec. 31, 2021, and the remaining balance by Dec. 31, 2022.
Employers should also make sure they took advantage of the employee retention credit, Ceschini said, which allowed businesses to deduct up to $10,000 per employee on their payroll tax returns for wages paid between March 20, 2020, and December 31, 2020. Employers that were either shut down by government order or saw a significant dip in sales during that time are eligible.
Such a late resolution to the issue of whether expenses paid with PPP loans were deductible, Ceschini said, means that year-end tax planning done before the Consolidated Appropriations Act went into effect could not be revamped accordingly.
"We had [clients] paying taxes on the information at hand," he said. "Some of them had to borrow money on their lines of credit to pay their taxes. It's not the worst thing in the world, but why would you pay taxes in advance if it weren't necessary, especially in such a bad year with the economy?"