Based on recent Google Trends, many small businesses have been searching “How does the PPP loan affect your small business taxes in New Jersey?” Let’s answer that question by first posing some pertinent, related questions you may already have that will better help to bolster and clarify our answer to the main question:
What if my first PPP loan was forgiven and not the second?
What are the tax consequences?
What if I’m a sole proprietor and not an LLC?
Do I have to report my PPP loan on my individual tax return?
In response to the great economic impact that COVID-19 has had on small businesses during the pandemic, the federal PPP (Paycheck Protection Program) was initiated in 2020 by the federal CARES Act (Coronavirus Aid, Relief, and Economic Security Act) to help businesses keep their employees on the payroll, with the ultimate hope for businesses being able to keep their doors open during these unprecedented times. The PPP has been thoroughly instrumental in helping countless businesses to stay in business, and, ultimately, for the country to remain up and running, even if not optimally.
The good news is that for Gross Income Tax purposes, any or all of the PPP Loan that has been forgiven through the federal PPP or federal CARES Act is not taxable, consequently negating the necessity for these amounts to be reported on Individual Tax Returns (NJ-1040, NJ-1040R or NJ-1041). Additionally, for Corporate Business Tax and Gross Income Tax purposes, business taxpayers are still able to deduct their essential, regular business-related expenditures, even if those expenses were paid for with the earnings from a PPP loan that was forgiven. This will consequently enhance the tax benefits of the loans for small businesses.
By and large, the criteria for federal PPP loan forgiveness is quite straightforward, provided that businesses were to have met the initial eligibility requirements. Namely, at least 60% of the PPP loan must have been spent on employee payroll costs, while the remaining 40% of the funds must have been used on other business-related expenses, including rent, mortgage interest, utility costs, operational expenses, as well as some often-overlooked expenses including PPE (personal protective equipment) for employees.
Regarding PPP loan forgiveness, it is based on employers continually having paid their employees at their regular levels for periods ranging from 8 to 24 weeks from the time that the loan was originated. Businesses who have accepted loans and eventually seek forgiveness must initially fill out and submit the appropriate PPP Loan Forgiveness Application to the private lender from whom they received their loan, provided that they were compliant with the terms of the original pre-loan application. However, it should be noted that loan forgiveness is not automatic and that borrowers must apply for forgiveness within the stated terms at the end of the loan’s covered period.
Even if you are a sole proprietor without or with employees (that is, without or with payroll costs), you can still apply for PPP loan forgiveness, keeping in mind that the stipulations differ accordingly:
If you were not to have payroll costs, which is somewhat simpler, your PPP loan amount will be calculated using your gross or net income that you reported on your Schedule C. To calculate your average monthly payroll expense, take your gross income (up to $100,000) and divide it by 12. Then take your average monthly payroll expense and multiply it by 2.5, which is your established PPP loan amount.
On the other hand, if you were a sole proprietor with payroll costs, this will require that you take a few additional steps to calculate your PPP loan. Utilizing your gross income that was reported on Line 7 of your 2019 or 2020 Schedule C, you will subtract any reported payroll costs from your gross income that you reported on Lines 14, 19, and 26. This value (capped at $100,000) will then be utilized to calculate your owner compensation or proprietor costs. Continue by adding in your 2019 or 2020 payroll costs from the same year of the Schedule C that you used to establish your gross income. Once you have added your annual payroll costs to the amount that you determined from your Schedule C, divide this amount by 12 (to identify your average monthly payroll expense), multiply this number by 2.5, and that is your PPP loan amount.
Still have questions about tax deductions for your business? Tsamutalis & Company LLC will work with you throughout the year to ensure compliance with tax laws and regulations while also maximizing your profits. Contact us to learn more about what it’s like to work with our team for your New Jersey small business accounting and tax needs.