As of March 15, 2021, COVID-19 has been confirmed as one of the deadliest pandemics in history with more than 119 million cases. The pandemic has resulted in significant global, social and economic disruption, including the largest global recession since the Great Depression. In response to COVID-19, Elected officials came together in March 2020 and created the CARES Act to provide relief for individuals and businesses that had been negatively impacted by the coronavirus outbreak.

CARES Act

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic in the United States. The bill primarily included $300 billion in one-time cash payments to individual people (also known as Stimulus Checks), $260 billion in increased unemployment benefits, the creation of the Paycheck Protection Program that provided forgivable loans to small businesses, $500 billion in loans for corporations, and $339.8 billion to state and local governments. An additional $900 billion in relief was attached to the Consolidated Appropriations Act (2021) which was passed by Congress on December 21, 2020, and signed by President Trump on December 27, after some CARES Act programs being renewed, had already expired.

Individual Stimulus Payments

The Internal Revenue Service (IRS) sent out more than 160 million stimulus payments since the CARES Act was signed into law on March 27, 2020. As people start to spend their money, some wonder: Is my stimulus payment taxable?

The short answer: No.

The IRS states: “No, the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer's refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs."

If, for some reason, you didn't receive any stimulus payments last year, but you're owed one, you can get it this year when you file your 2020 tax return by claiming the Recovery Rebate Credit.

paycheck protection program (PPP)

The Paycheck Protection Program, also known as the PPP Loan, is an SBA-backed loan that helps businesses keep their workforce employed during the Coronavirus (COVID-19) crisis.

PPP Loan Uses

PPP Loans could be used to help fund payroll costs, including benefits, to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses.

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 2020 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.

ppp loan tax audit

In recent months, 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.

Economic Injury Disaster Loans (EIDL)

The Economic Injury Disaster Loan (EIDL) provided economic relief to small businesses and nonprofit organizations that were experiencing a temporary loss of revenue. The purpose of this loan was to meet financial obligations and operating expenses that could have been met by the business had the disaster not occurred.

EIDL advance (grant)

The EIDL advance is for up to $10,000 and completely forgivable, making it a grant. As long as a business uses the funds to cover payroll, paid leave for employees, healthcare costs, operating expenses and anything else related to the COVID-19 pandemic, the advance is forgiven and no repayment is required. The grant is primarily meant to help businesses maintain their workforce.

Is EIDL Advance (Grant) Taxable?

Since there is no obligation to repay your EIDL advance, it generally is taxable income to you, but there is an administrative exception, called the general welfare exception, which allows you to exclude some payments made by governmental units under a social benefit program from your taxable income.

The IRS usually makes determinations on specific types of general welfare payments in a revenue ruling. And here is the good news, the IRS has consistently held that payments made to taxpayers due to disasters fall under the general welfare exception and aren’t taxable. The second stimulus bill clarified that the grant will be tax-free. It does not need to be included in your taxable income when filing your taxes.

eidl - loan

The EIDL program is designed to provide economic relief to small business owners, including agricultural businesses, and nonprofit organizations in all U.S. states, Washington D.C., and territories. This is a non-forgivable low-interest loan deferred for 1 year (accruing interest) payable over 30 years that can be used for working capital and normal operating expenses. Since the EIDL is like any other loan and is not a forgivable loan, the funds received are not taxable.

city and county grants

The CARES Act established the $150 billion Coronavirus Relief Fund. The Treasury made payments from the Fund to States and eligible units of local government to be used for necessary expenditures incurred due to the public health emergency.

City or County Grant

Some governments used the funds to establish grant programs to assist and support businesses.
Per the IRS, these funds are considered gross taxable income to any business receiving the grant. The receipt of a government grant by a business generally is not excluded from the business's gross income under the Code and therefore is taxable.

City or County Loan

Some governments used the funds to establish loan programs to assist and support businesses.
Per the IRS, these funds are not included in gross income. However, if the government forgives all or a portion of the loan, the amount of the loan that is forgiven is generally included in gross income of the business and is taxable unless an exclusion in section 108 of the Code or other Federal law applies. If an exclusion applies, an equivalent amount of any deductions, basis, losses or other tax attributes may have to be reduced in accordance with the Code or other Federal law.

Employee Retention Credit for 2020

On March 1, 2021 the Internal Revenue Service issued guidance for employers claiming the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), for calendar quarters in 2020.

For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit is equal to 50 percent of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020.

A significant change for 2020 made by the Relief Act permits eligible employers that received a Paycheck Protection Program (PPP) loan to claim the employee retention credit, although the same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the employee retention credit. Notice 2021-20 explains when and how employers that received a PPP loan can claim the employee retention credit for 2020.

Notice 2021-20 PDF also provides answers to questions such as: who are eligible employers; what constitutes full or partial suspension of trade or business operations; what is a significant decline in gross receipts; how much is the maximum amount of an eligible employer's employee retention credit; what are qualified wages; how does an eligible employer claim the employee retention credit; and how does an eligible employer substantiate the claim for the credit.

COVID Stimulus - What's Taxable?