How Will PPP Loans & EIDL Advances Affect My State & Federal Taxes?
PPP loans aren't taxable at the federal level, but state tax implications vary.
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Expert Analyst & Reviewer
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Update, September 1: The Employee Retention Tax Credit has been extended through 2021 as a result of the American Rescue Plan. Additionally, while PPP loans aren’t taxable at the federal level, state tax implications vary by state. Information outlining the current tax implications by state has been added. We will continue to provide updates if statuses change in the future.
Update, January 11: The stimulus package bill was passed and the Small Business Administration (SBA) announced that the PPP program will open this week. Read our post PPP Round 2: Main Differences Between The First & Second Round Of PPP Funding to learn more.
Update, December 23: President Trump called the bill a “disgrace” on Tuesday evening while threatening to possibly veto it. House Democrats have since drafted a stand-alone bill that would answer one of the President’s demands — $2,000 stimulus checks. The House is set to reconvene December 24.
Update, December 22: Congress passed the bill late Monday night. It now goes to President Trump for his signature.
As a small business owner, odds are you were affected by the COVID-19 pandemic. Whether this meant shutting your doors temporarily, reducing your number of customers, or shifting to remote work, the pandemic has undoubtedly caused some challenges for your business. If you were like millions of other small business owners, you got at least a little bit of financial relief through the US government’s Paycheck Protection Program (PPP) or the Economic Injury Disaster Loan (EIDL) advance.
So, now, here we are. You’ve received your funding, you’ve spent it, and perhaps you’ve even applied for loan forgiveness. But there’s still a nagging thought in the back of your mind: How does this affect your taxes? Do you have to pay taxes on your PPP loan? Will you be on the hook with the IRS for the funding you received with the EIDL advance?
Digging through IRS publications or trying to decipher information released by the SBA can leave you scratching your head. In this post, we will break the tax implications down for you so that it’s easily digestible. We’ll cover how PPP loans and EIDL advances affect your state and federal taxes, so you can be fully prepared when it’s time to file.
One thing to note is that laws surrounding these government loans have changed over the last few months. We will continue to monitor these changes and update this post accordingly.
Table of Contents
New Information: How The PPP Loan Affects State & Local Taxes
Under the Coronavirus Aid, Relief, and Economic Security Act, the way that forgiven loan funds are taxed at the federal level is different than usual (more on that later). While it’s clear that forgiven loan funds are not to be included in taxable income for federal tax purposes, things become a little more complicated when it comes to state and local taxes.
While your forgiven PPP loan funds may be exempt from federal taxation, you may still be required to claim these funds as taxable income when filing your state tax return. How your forgiven loan is taxed at the state level is dependent upon your state’s compliance with the Internal Revenue Code (IRC). Over 20 states have rolling conformity, meaning that they conform to the IRC as changes and amendments occur.
Other states, however, have different rules when it comes to IRC conformity. This includes:
- Static Conformity: Also known as fixed-date conformity; conforms with the IRC occurs on a specific date
- Annual Conformity: Conforms with the IRC on an annual basis
- Selective Conformity: Conforms with specific provisions of the IRC
Still confused? Don’t worry — you don’t have to become a tax professional to understand what this means for your business. What it boils down to is that different states have different conformity rules. In other words, while there are no federal tax implications for your forgiven PPP loan, there may be state implications based on where you live.
How does this affect you and your business tax return? In some states, you may be required to include PPP funds as part of your taxable income. To further complicate matters, some states also have restrictions on deducting business expenses paid for using PPP loan funds.
As with the other information contained within this article, rules may be subject to change. We here at Merchant Maverick will continue to update this article as changes occur.
Which States Are Taxing PPP Loans?
Understanding why some states are taxing PPP loans is confusing for anyone without tax experience. Instead of wading blindly through tax laws, use this chart to determine how taxation of PPP funds is handled in your state. This handy resource shows which states allow you to exclude PPP loans as taxable income. It also shows which states allow you to lower your tax liability by deducting expenses paid for using PPP loan funds.
| State | Excluded From Taxable Income | Expense Deductions Allowed |
|---|---|---|
| Alabama | ✔ | ✔ |
| Alaska | ✔ | ✔ |
| Arizona | ✔ | ✔ |
| Arkansas | ✔ | ✔ |
| California | ✔ | Special Circumstances |
| Colorado | ✔ | ✔ |
| Connecticut | ✔ | ✔ |
| Delaware | ✔ | ✔ |
| Florida | X | ✔ |
| Georgia | ✔ | ✔ |
| Hawaii | ✔ | X |
| Idaho | ✔ | ✔ |
| Illinois | ✔ | ✔ |
| Indiana | ✔ | ✔ |
| Iowa | ✔ | ✔ |
| Kansas | ✔ | ✔ |
| Kentucky | ✔ | ✔ |
| Louisiana | ✔ | ✔ |
| Maine | ✔ | ✔ |
| Maryland | ✔ | ✔ |
| Massachusetts | ✔ | ✔ |
| Michigan | ✔ | ✔ |
| Minnesota | ✔ | ✔ |
| Mississippi | ✔ | ✔ |
| Missouri | ✔ | ✔ |
| Montana | ✔ | ✔ |
| Nebraska | ✔ | ✔ |
| Nevada | X | X |
| New Hampshire | ✔ | ✔ |
| New Jersey | ✔ | ✔ |
| New Mexico | ✔ | ✔ |
| New York | ✔ | ✔ |
| North Carolina | ✔ | X |
| North Dakota | ✔ | ✔ |
| Ohio | ✔ | Special Circumstances |
| Oklahoma | ✔ | ✔ |
| Oregon | ✔ | ✔ |
| Pennsylvania | ✔ | ✔ |
| Rhode Island | Special Circumstances | ✔ |
| South Carolina | ✔ | ✔ |
| South Dakota | No State Income Tax | No State Income Tax |
| Tennessee | ✔ | ✔ |
| Texas | ✔ | ✔ |
| Utah | X | ✔ |
| Vermont | ✔ | ✔ |
| Virginia | ✔ | Special Circumstances |
| Washington | ✔ | X |
| Washington D.C. | ✔ | ✔ |
| West Virginia | ✔ | ✔ |
| Wisconsin | ✔ | ✔ |
| Wyoming | No State Income Tax | No State Income Tax |
While most states make it clear whether PPP funds are taxable and/or deductible, there are a few things to note if your business is located in one of the following states:
- California: An expense deduction is not allowed for publicly traded companies in California. Additionally, businesses that did not have a decline of at least 25% in gross receipts between 2019 and 2020 can not deduct expenses paid for using forgiven PPP loan funds.
- Nevada: While Nevada does not have a state income tax, it does have a Gross Receipts Tax (GRT), tax that is applied to the gross sales of a business. In Nevada, forgiven PPP funds are to be included in taxable gross revenue. Additionally, no deduction for business expenses paid for using PPP funds is allowed.
- Ohio: Ohio has both a GRT and individual income tax. For individual income tax purposes, forgiven PPP loans are excluded from taxable income and business deductions are allowed. However, under the GRT, deductions for business expenses paid for using PPP funds are disallowed.
- Rhode Island: In Rhode Island, only forgiven PPP loans of $250,000 or less can be excluded from taxable income.
- South Dakota: South Dakota has no state income tax.
- Virginia: In Virginia, only the first $100,000 of PPP funds that were spent on business expenses can be deducted.
- Washington: Washington levies a GRT. Under the GRT, deductions for business expenses paid for using PPP funds are disallowed.
- Wyoming: Wyoming has no state income tax.
How The PPP Loan Affects Federal Taxes
The Small Business Administration’s PPP loans gave billions of dollars to encourage small business owners to maintain their payroll and keep their workers employed. According to the SBA, over 5 million businesses received loans through this funding program.
Under this program, small business owners could receive up to two-and-a-half times their average monthly payroll (with a maximum cap of $10 million) to cover payroll and other critical business expenses, such as utilities, mortgage interest, and rent paid under a lease.
When spent on approved expenses, these loans are 100% forgivable, meaning that the funds are not required to be repaid. For expenses that weren’t on the SBA’s list, funds would be repaid with a low interest rate and long repayment terms.
This program helped millions of businesses by providing over $5 billion to eligible applicants. For many, this funding came at the right time, allowing small businesses to keep their doors open and employees on staff. However, as we approach the end of the year, the program is over, and businesses are now applying for loan forgiveness or calculating how much money they owe. For many business owners, though, the end of the year also signals tax season on the horizon and the looming question: How will PPP loans affect federal income tax returns?
Are PPP Loans Taxable?
For federal tax purposes, PPP loan funds that have been forgiven are excluded from your business’s gross income. In other words, any portion of your PPP loan that has been forgiven will not be included as part of your company’s taxable income.
PPP loan funds that were not forgiven are similar to other loans. Unforgiven PPP loan funds are not included as part of your taxable gross income.
PPP Loans & Tax Deductions
The IRS issued a notice that further clarifies how PPP loan funds should be handled for federal income tax returns, initially making it so that expenses paid with PPP funds could not be claimed as deductions.
Fortunately, in December 2020, Congress made a change that superseded this notice, stating, “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided,” in Section 1106 of the CARES Act.
In layman’s terms, this means that expenses paid with PPP loan proceeds can be claimed as deductions.
In summary, this is what you should expect from your PPP loan come tax time:
- Forgiven loan funds are not counted as taxable income and may be deducted from your business expenses
- Loan funds that are not forgiven are not counted as taxable income and may be deducted from your expenses
How The EIDL Loan Affects Taxes
Another loan you may have taken advantage of during the COVID-19 pandemic is the Economic Injury Disaster Loan, or EIDL. One notable difference between the EIDL for those affected by the coronavirus and past EIDLs is that the Small Business Administration offered an advance of up to $10,000 for qualifying small businesses. This advance allowed businesses to receive funds quickly. While EIDL funds are required to be repaid, the EIDL Advance was a grant that does not have to be repaid.
Funds obtained through the EIDL and EIDL Advance could be used as working capital or to cover any other operating expenses for businesses impacted by COVID-19.
Is The EIDL Grant Taxable?
If you received the EIDL loan, taxes on these funds work like any other business loan taxation. In other words, funds from the EIDL are not reported as taxable business income on your tax return. You can also lower your tax liability by deducting any expenses covered by the use of these funds.
Initially, funds from EIDL Advances were to be reported as taxable income. However, this decision was reversed under the Consolidated Appropriations Act. Now, funds from an EIDL Advance are not reported as taxable business income. Additionally, qualifying expenses can be written off to lower your tax liability.
How The Employee Retention Credit Affects Taxes
Small business owners may be eligible to claim the Employee Retention Credit. This credit is available to businesses with 500 or fewer employees that also meet the following criteria:
- Required by a governmental authority to fully or partially suspend operations as a result of COVID-19, or
- Experienced a gross decline in receipts of at least 50% in a calendar quarter in 2020 when compared to the same quarter in 2019
If you are eligible, you can receive a credit of up to 50% of eligible wages paid per quarter to each employee. Maximum wages per quarter per employee are capped at $10,000. That means you can claim a maximum of $5,000 per quarter per employee. You do not need to wait to claim this credit when you file your annual income taxes. Instead, credits can be claimed on your quarterly tax return.
Additional legislation was enacted that extended the Employee Retention Credit through 2021.
Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan of 2021, employers can claim a tax credit against their share of Social Security taxes equal to 70% of eligible wages paid to employees from January 1, 2021, through December 21, 2021. The maximum credit per quarter under these laws is $7,000 per quarter per employee. For 2021, a maximum of $28,000 per employee can be claimed as a credit.
If You Received A PPP Loan, Expect A Tax Audit
The SBA and the US Treasury have announced that all PPP loans in excess of $2 million will be audited. Loans that are less than $2 million are subject to an audit, and it has been reported that much lower loans have been scrutinized. What does this mean for you? In short, all recipients of the PPP loan should expect to be audited, as there is a higher probability that the IRS will audit you.
“Audit” is a pretty scary word, especially if you’ve never faced one before. However, as long as you have your records in order and used funds appropriately, the audit process should be pretty painless. Here’s how to make the process go as smoothly as possible:
- Don’t Procrastinate: Sure, an audit can be scary but ignoring it won’t make it go away. Read over your notice carefully and begin compiling your documentation as soon as possible.
- Keep All Records: Receipts, statements, payroll records, and PPP documentation should be kept on file for at least six years after your PPP loan is fully repaid or forgiven.
- Make Copies: If you’re sending off documentation, make sure to send copies. Always retain your original documentation in case you need it at a later time.
- Hire A CPA: A CPA, unlike a regular accountant, will be able to represent and defend your business against the IRS, if necessary. A CPA can also offer important advice for tax preparation and future audits.
Did you receive a PPP loan, and you’re being audited? Check out our post, PPP Loans & Tax Audits: What Your Business Needs To Know, so you’ll know what to expect.
Other PPP & EIDL Tax FAQs
Didn’t find the answers you were looking for? Take a look at some of the most-asked questions about how PPP and EIDL loans may affect your taxes.
Erica Seppala
Expert Analyst & Reviewer at Merchant Maverick
An expert in accounting, finance, and point of sale, Erica has been researching and writing about all things small-business since 2018. Erica's insights into personal and business finance have been cited in numerous publications, including MSN, Real Simple, and Reader's Digest. She is a graduate of Limestone College.
View Erica Seppala's professional experience on LinkedIn.
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Does this mean EIDL Advances are not subject to the Treasury Offset Program ?
This comment refers to an earlier version of this post and may be outdated.
Hi Johnny!
The Treasury Offset Program has a list of payments that are exempt from offset that can be viewed here. According to that document Economic Injury Disaster Loan payments issued under section 1110 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) are exempt from offset. This includes EIDL Advances.
This comment refers to an earlier version of this post and may be outdated.
In your response to Rick, you say “Yes, EIDL Advances are no longer counted as taxable income, but EIDLs themselves are still taxable income.” I agree on your first point, but not the second about EIDLs themselves are still taxable income” If it’s a loan (Economic Injury Disaster LOAN) to be repaid, how can it be taxable income? Overall a good article, but consider correcting your last post Jessica.
Thanks!
Joe
This comment refers to an earlier version of this post and may be outdated.
Correction: looks like that was your FIRST post way back on January 19th.
This comment refers to an earlier version of this post and may be outdated.
Hi Joe!
Thank you for pointing out the error in the previous response. Unfortunately, when this article was first written, there was a lot of confusion and conflicting information. Once all of the details were ironed out, we did go back and correct the article. We apologize for any misinformation as we waited for guidance to be released surrounding COVID-19 relief. All information has been updated within the article and we will always continue to monitor any news and updates provided by the SBA and other organizations to ensure we provide accurate information in each of our articles both now and in the future. Thank you for your comment!
This comment refers to an earlier version of this post and may be outdated.
Good information thanks.
My question is: we paid most of the PPP loan out to our employees and we understand we do not have a tax liability. We included the money in their 1099’s but they have read that it is not taxable. Is it?
This comment refers to an earlier version of this post and may be outdated.
Hello Cecil,
PPP funds paid to employees are still taxable wages. The loan funds for the employer are NOT taxable, but employees will pay taxes on funds that they receive from the employer — I hope that makes sense.
This comment refers to an earlier version of this post and may be outdated.
Thanks for the detailed article. Is the employee retention tax credit taxable? I have filed 941-X for Q1, Q2, Q3 nd Q4 2020 for employee retention tax credit. Say the employee retention tax credit refund is $50,000 in total for these four quarters. Is this $50,000 taxable income for year 2021?
This comment refers to an earlier version of this post and may be outdated.
Hi Mary,
The $50,000 would NOT be included as taxable income. However, this would fall under the expense disallowance rules of the IRS, so deductible wage expenses would be reduced by $50,000. This means that an additional $50K in income would be subject to taxes. Bloomberg has a good article that breaks it down.
This comment refers to an earlier version of this post and may be outdated.
Thanks for sharing such a detailed article about How Will PPP Loans & EIDL Advances Affect My 2020 Taxes? keep up the good work!
This comment refers to an earlier version of this post and may be outdated.
Don’t forget about Enrolled Agents (EA) whose specialty is taxes. There are many good CPA’s who work with taxes, but just because an accountant is a CPA does not necessarily mean that they specialize in taxation. Do your research in advance.
In addition, be aware that your state law can be vastly different from Federal Law. Some states completely decoupled from the CARES Act, some states adhere to only SOME of the CARES Act, and some states adopted all of the provisions of the CARES Act. Know what your state laws are for your situation.
Finally, find a solid tax preparer for this year. The CARES Act provided many sweeping changes, and then Dec 27th, 2020 changed many of the rules. Advice given to clients in May of 2020 changed when the same question was asked in January of 2021. This is oversimplifying it, but the tax laws are almost a moving target this year.
This comment refers to an earlier version of this post and may be outdated.
Will receipt of the ERC reduce wages/taxes deductible on the employers federal tax return or will it be treated similar to the PPP loans forgiven?
This comment refers to an earlier version of this post and may be outdated.
Hi Staci,
The IRS says:
You can check out FAQs number 85 and 86 for more information on how the ERTC will affect your federal tax return.
This comment refers to an earlier version of this post and may be outdated.
I have a question and can’t find the subject touched upon anywhere. If you applied for PPP loan and also had outstanding SBA loan, PPP automatically added 6 months of monthly loan payments due on top of your PPP loan amount. When you apply for PPP loan forgiveness, those SBA loan payments are not included on the form. How do you treat those SBA loan payments provided under PPP stimulus loan program? Taxable? Exempt? Can you shed any light please..
This comment refers to an earlier version of this post and may be outdated.
Hi Thomas,
If you are referring to the SBA’s debt relief program that pays six months of your existing SBA loan, there isn’t any official SBA guidance on that, unfortunately. However, several reputable sources state that per the IRS Tax Code, these payments should be considered taxable income.
This comment refers to an earlier version of this post and may be outdated.
FYI, under the Consolidated Appropriations Act, businesses that have received PPP loans are now eligible for the Employee Retention Credit. It does not matter whether or not you paid back your PPP loan, as stated in your article. Also, this is retroactive to the CARES Act (March 13th).
This comment refers to an earlier version of this post and may be outdated.
Hi Shane,
Thanks very much for your comment! We’ve updated the post with the most current information available to us.
This comment refers to an earlier version of this post and may be outdated.
Loans aren’t taxable ever. So the EIDL is not taxable. Don’t tell people that. Also I find nowhere in the Consolidated Appropriations Act of 2021 anywhere that EIDL grants are not taxable. I really don’t think you are qualified to be delivering tax advice.
This comment refers to an earlier version of this post and may be outdated.
Hi Caroline,
There have been a lot of changes throughout this process and we do our very best to get our content updated as soon as we are made aware of a change (updated again yesterday). Unfortunately, the IRS and SBA have been extraordinarily vague, so much is left open to interpretation until clarity is provided. Thanks very much for your comments- we’ve combed through the relevant posts and updated them with the most current information available to us.
This comment refers to an earlier version of this post and may be outdated.
Thank you for this nice and detailed article. My question is regarding if the EIDL advance (the $1,000/employee) is taxable or not. You said it is taxable while other authors like Alan Gassman and Rachel Most at Wipfli all said it is not taxable as a result of the Consolidated Appropriations 2021. Would you please kindly comment on where the discrepancies of interpretation maybe? Thank you in advance.
This comment refers to an earlier version of this post and may be outdated.
Hi Rick,
Good catch! Yes, EIDL Advances are no longer counted as taxable income, but EIDLs themselves are still taxable income. Unfortunately, there is a lot of room for interpretation discrepancies in the SBA documents! We’ve updated our post to reflect this change. Thanks so much for posting.
This comment refers to an earlier version of this post and may be outdated.
In regards to EIDL Advance (grant of $1000 per employee), if it was considered taxable, you should be receiving a 1099-G document indication the taxable amount in Box 6.
I’m not an accountant, but a business owner who received an EIDL Advance, a PPP loan that was forgiven and a City Grant in 2020. I only received a 1099-G from my city with the TAXABLE grant amount in BOX 6, and didn’t receive any other documents regarding other income.
Thanks
Ali
This comment refers to an earlier version of this post and may be outdated.