The government created the Paycheck Protection Program (PPP) in response to COVID-19 disruption to businesses. Through the program, the government distributed over $500 billion. However, the program has changed severally since its inception in March 2020. That’s why small businesses still struggle to navigate various aspects of the PPP.

If you received PPP funds, you probably want to know what next. For more clarity, Michigan business and estate planning attorneys can answer your questions and clarify anything you don’t understand. They can also update you on the current status of the PPP funds.

How Do I Know If I Have Round 1 or Round 2 PPP Funds?

If you received a PPP loan and aren’t sure if it’s from round 1 or 2, here’s how to differentiate:

  • Round 1: You received the loan in 2020
  • Round 2: You received the loan in 2021

If you have been a recipient of two PPP loans, the first loan is the “first draw” PPP loan, and the second is a “second draw” PPP loan.

How Do the PPF Funds Affect My Taxes?

The PPP funds left some business owners wondering how they would affect their taxes. The answers may be hard to nail down due to the shifting guidance from the IRS. However, the new rules spelled out in the latest coronavirus relief round can help end the confusion. Here’s what to know:

You Can Deduct Expenses Paid with PPP Loan

Initially, the IRS held that business expenses paid with PPP loan funds couldn’t be deducted if the loan is or will be forgiven. However, that later changed when the government signed the Relief Act into law on December 27, 2020. The legislation specifies that PPP fund beneficiaries shouldn’t be denied deductions simply because the loan is forgiven.

In other words, expenses that you pay with the PPP loan are deductible. The outcome effectively creates two layers of tax benefits for people who received PPP funds. The first benefit is that the loans are income-tax-free, and the second is that businesses can claim income deductions on expenses paid. Our Business lawyers in Bloomfield Hills can provide further guidance.

Forgiven PPP Loans Are Not Taxable

Historically, if a business loan is forgiven, it automatically becomes taxable income. That has been an internal revenue code for the longest time. However, PPP loans break from that code, with IRS clarifying that forgiven PPP loans will not count as taxable income. That applies whether the loan is forgiven or just a portion.

You Can’t Use PPP Funds for Business Taxes

With the latest round of coronavirus relief, business owners have more flexibility with how they can spend their PPP funds. You can use the funds for protective equipment, business software, and property damage.

Business taxes aren’t part of the expanded list of PPP funds. So, any amount you use from the PPP fund to pay business taxes won’t be forgiven.

You Can Still Claim the Employer Retention Tax Credit

If your business meets the requirements, it can claim the Employee Retention Tax Credit. However, an important caveat is that you can’t claim wages paid using a forgiven PPP loan. You can only claim a credit on wages paid above and beyond the forgiven amount.

Am I Eligible for PPP Loan Forgiveness?

Your PPP loan can be forgiven on the following terms for the first draw PPP loan:

  • You spent at least 60% on employee payroll
  • Employee and compensation levels are maintained
  • You spent the loan proceeds on payroll costs and other eligible expenses

Check that you meet the following conditions to have the second draw loan forgiven:

  • You spent the loan proceeds on payroll costs and other eligible expense
  • You maintained employee and compensation levels at the same level as required for the first draw PPP loan
  • At least 60% of the proceeds went to payroll costs

However, these conditions must have been met during the 8-24-week period following the loan disbursement.

When to Apply for Forgiveness

You can apply for forgiveness once you’ve used all the proceeds for which you’re requesting forgiveness. You can apply for forgiveness any time up to the loan maturity.

If you don’t apply for forgiveness within ten months after the last day of the covered period, your payment will no longer be deferred. You’re required to start making loan repayments to your PPP lender. If you believe you have a genuine reason why you should be forgiven despite not meeting this condition, consult our business lawyers in Bloomfield Hills for a case review.

Experienced Business Attorneys Helping You Make the Right Business Decisions

A lot goes into the Paycheck Protection Program, and it’s prudent to understand how it affects your taxes and other business factors. The documentation involved is complex, and you might find yourself on the wrong side of the law if you’re not keen. That’s why working with Michigan business and estate planning attorneys is essential.

Our experienced Bloomfield Hills business lawyers can walk you through all you need to know about your PPP loan. If there’s a dispute between you and your lender, we can step in to help resolve the conflict. Contact us to schedule a FREE initial consultation with one of our experienced business lawyers.