What are the tax implications of an SBA relief loan?
May 11, 2020 8:15 PM Subscribe
I’m a sole proprietor with no employees, and I've been offered both EIDL and PPP relief loans from the SBA. Phew! But now I need someone to explain business loans to me like I’m a 5-year-old.
My small business has been adversely affected by the pandemic and I’ve been offered both a PPP loan and an EIDL loan from the SBA. I’m looking to use both loans mainly to offset lost income and keep my family solvent — essentially, to pay my own salary and keep myself in business. But having never taken out a business loan in the past, I’m finding this all very confusing, especially when it comes to the tax issues.
This is all complicated by the fact that I don’t pay myself a salary — I record my business income & expenses on a Schedule C, then pay taxes on my profits (including self-employment tax etc) via my personal 1040 return. I’ve always considered my business profits and my personal income as basically interchangeable. But that seems to get complicated when I’m using a loan to cover lost income.
For a personal loan, I wouldn’t be taxed on what I borrowed, and I’d pay back the loan with regular post-tax dollars. It’s not income, it’s just borrowed money that has to get paid back. With a business loan, though, things feel murkier, especially with SBA loans that have to be used for specific purposes.
I have a few specific questions:
1) If a business uses a loan to make payroll, the employees pay taxes on their earnings. But if I take out a business loan as a sole proprietor, do I pay taxes on any money from the loan that I use to cover my lost earnings? At what point does that amount wind up on my Schedule C and my 1040? Or does this all effectively get ignored for tax purposes, and wash out when I subsequently repay the loan?
2) This is further complicated by the PPP loan being partly forgivable — they’ve said the forgiven portion won’t count as taxable business income, but does that also mean I won’t be taxed on the portion I use as owner compensation? Or should I be putting a portion of that money aside to pay taxes next April?
3) The biggest question that I think I’m struggling with: When it comes time to repay the loans, do I make those repayments with post-tax dollars, as though it had been a personal loan? Or do the repayments get treated as a business expense and deducted from my business profits for the purpose of paying my income tax? How does the Schedule C interest deduction factor into that?
Basically, I can’t tell when exactly the taxman gets a bite of this money, which means I’ve no idea how much (if any) I should set aside for future personal taxes. What am I missing?
My small business has been adversely affected by the pandemic and I’ve been offered both a PPP loan and an EIDL loan from the SBA. I’m looking to use both loans mainly to offset lost income and keep my family solvent — essentially, to pay my own salary and keep myself in business. But having never taken out a business loan in the past, I’m finding this all very confusing, especially when it comes to the tax issues.
This is all complicated by the fact that I don’t pay myself a salary — I record my business income & expenses on a Schedule C, then pay taxes on my profits (including self-employment tax etc) via my personal 1040 return. I’ve always considered my business profits and my personal income as basically interchangeable. But that seems to get complicated when I’m using a loan to cover lost income.
For a personal loan, I wouldn’t be taxed on what I borrowed, and I’d pay back the loan with regular post-tax dollars. It’s not income, it’s just borrowed money that has to get paid back. With a business loan, though, things feel murkier, especially with SBA loans that have to be used for specific purposes.
I have a few specific questions:
1) If a business uses a loan to make payroll, the employees pay taxes on their earnings. But if I take out a business loan as a sole proprietor, do I pay taxes on any money from the loan that I use to cover my lost earnings? At what point does that amount wind up on my Schedule C and my 1040? Or does this all effectively get ignored for tax purposes, and wash out when I subsequently repay the loan?
2) This is further complicated by the PPP loan being partly forgivable — they’ve said the forgiven portion won’t count as taxable business income, but does that also mean I won’t be taxed on the portion I use as owner compensation? Or should I be putting a portion of that money aside to pay taxes next April?
3) The biggest question that I think I’m struggling with: When it comes time to repay the loans, do I make those repayments with post-tax dollars, as though it had been a personal loan? Or do the repayments get treated as a business expense and deducted from my business profits for the purpose of paying my income tax? How does the Schedule C interest deduction factor into that?
Basically, I can’t tell when exactly the taxman gets a bite of this money, which means I’ve no idea how much (if any) I should set aside for future personal taxes. What am I missing?
What am I missing?
That you need to talk to an actual accountant familiar with the business tax situation in your state. And stay in touch with them.
Not least because not only is this confusing enough in the first place that you want an actual expert to weigh in on this and not try to figure this out on your own, but (IMO) there's a good chance the terms of the loans and the tax situation could be different by the time you actually need to pay taxes - we're all in flux here, the accountant who handles things for the small business I work for had a big Zoom conference with all of her clients the day after the first PPP was approved and had to pretty much walk about half of her advice and answers back within 48 hours as the SBA started changing and defining and clarifying things.
posted by soundguy99 at 8:46 PM on May 11, 2020 [1 favorite]
That you need to talk to an actual accountant familiar with the business tax situation in your state. And stay in touch with them.
Not least because not only is this confusing enough in the first place that you want an actual expert to weigh in on this and not try to figure this out on your own, but (IMO) there's a good chance the terms of the loans and the tax situation could be different by the time you actually need to pay taxes - we're all in flux here, the accountant who handles things for the small business I work for had a big Zoom conference with all of her clients the day after the first PPP was approved and had to pretty much walk about half of her advice and answers back within 48 hours as the SBA started changing and defining and clarifying things.
posted by soundguy99 at 8:46 PM on May 11, 2020 [1 favorite]
Best answer: Not everyone can afford a tax expert or accountant right now, or the time to find a good one. So we definitely need sources that are somewhere in between. A water cooler of solo proprietors. Consider looking for those networks, where people are asking similar questions and digging through SBA paperwork for answers you can verify yourself.
I am a business owner of an LLC, I am not an owner of your kind of business necessarily, IANA lawyer or accountant. I'm not applying for the EIDL but I did get the PPP. I'm not unconfused but I'm confident about the steps I've taken and their margin of uncertainty. I'm wandering through this just like you and my perspective may change after a day or a week or a month.
One reason this is hard is the rules are changing as they go. They have been adding rules which adjust how the law is deployed. So it's not that you're deficient—it's that this is confusing and poorly managed.
Hopefully 1:1 professional support is within your reach. Either way, more info and solidarity don't hurt. Here are my current sources for federal COVID-19 funding info:
- My bank
- Online banks where I applied but which didn't fund my company
- Facebook group called Financial Literacy for Women Business Owners. The woman who runs it is an accountant. It's not spammy. She's doing multiple livestreams per week and answering questions in the comments. Lots of check-ins where members share what kind of loan they've gotten, from which bank and under which terms. I can't speak to the membership criteria re: identifying as a woman.
- Various banks and lenders have been doing webinars and offering support. Azlo and Fundera did a joint webinar a few weeks ago; it's on YouTube. Check the social media of other small business service providers to see what else is out there. Remember that things may have changed.
- The same groups are writing blog posts about this. Again, Fundera is one to look into for this.
- Other industry groups, associations, conferences. Networks that support consultants. Chambers of Commerce. Regional and local nonprofit networks have been producing content, for example. I can DM you some resources if you like. Now is a good time to get info even if it's from a sector you don't belong to.
Others have mentioned Reddit.
I have various sources of info and as I hear from them all, I get a sense of what's opinion, what's likely (but not verified) and what's a fact verifiable by documentation. It's been immensely valuable to find networks that closely match my business type.
Speaking to your questions, my current understanding is you treat it all like a business expense. I believe it's not taxed when you get it as a loan, but it is after that. Things are uncertain but it would be prudent to calculate your taxes as though you will be paying taxes on it. It's worth the peace of mind for me. The Facebook group had an in-depth post on this which I can DM to you if you can't join the group, or don't want to.
Aside from this, make sure you document everything.
Fortunately / unfortunately, MANY people are in the same boat and there is pressure for the SBA to clarify. Fully unfortunately, given the shoddy implementation to date, I doubt we can rely on them for consistency even once updates are made.
Good luck!
posted by rockyraccoon at 6:11 AM on May 12, 2020 [1 favorite]
I am a business owner of an LLC, I am not an owner of your kind of business necessarily, IANA lawyer or accountant. I'm not applying for the EIDL but I did get the PPP. I'm not unconfused but I'm confident about the steps I've taken and their margin of uncertainty. I'm wandering through this just like you and my perspective may change after a day or a week or a month.
One reason this is hard is the rules are changing as they go. They have been adding rules which adjust how the law is deployed. So it's not that you're deficient—it's that this is confusing and poorly managed.
Hopefully 1:1 professional support is within your reach. Either way, more info and solidarity don't hurt. Here are my current sources for federal COVID-19 funding info:
- My bank
- Online banks where I applied but which didn't fund my company
- Facebook group called Financial Literacy for Women Business Owners. The woman who runs it is an accountant. It's not spammy. She's doing multiple livestreams per week and answering questions in the comments. Lots of check-ins where members share what kind of loan they've gotten, from which bank and under which terms. I can't speak to the membership criteria re: identifying as a woman.
- Various banks and lenders have been doing webinars and offering support. Azlo and Fundera did a joint webinar a few weeks ago; it's on YouTube. Check the social media of other small business service providers to see what else is out there. Remember that things may have changed.
- The same groups are writing blog posts about this. Again, Fundera is one to look into for this.
- Other industry groups, associations, conferences. Networks that support consultants. Chambers of Commerce. Regional and local nonprofit networks have been producing content, for example. I can DM you some resources if you like. Now is a good time to get info even if it's from a sector you don't belong to.
Others have mentioned Reddit.
I have various sources of info and as I hear from them all, I get a sense of what's opinion, what's likely (but not verified) and what's a fact verifiable by documentation. It's been immensely valuable to find networks that closely match my business type.
Speaking to your questions, my current understanding is you treat it all like a business expense. I believe it's not taxed when you get it as a loan, but it is after that. Things are uncertain but it would be prudent to calculate your taxes as though you will be paying taxes on it. It's worth the peace of mind for me. The Facebook group had an in-depth post on this which I can DM to you if you can't join the group, or don't want to.
Aside from this, make sure you document everything.
Fortunately / unfortunately, MANY people are in the same boat and there is pressure for the SBA to clarify. Fully unfortunately, given the shoddy implementation to date, I doubt we can rely on them for consistency even once updates are made.
Good luck!
posted by rockyraccoon at 6:11 AM on May 12, 2020 [1 favorite]
Secondary point: I've found it very helpful to separate my business and personal finances. I think this will help you answer these questions and others that come up.
I have separate accounts and I pay myself from the business account. This is called an owner's draw. Separating them can be done anytime. Basically, the two kinds of money will no longer be interchangeable.
If you have an LLC it can add to your legal protection and it certainly makes documentation easier. It adds a mental separation and clarity that has made a big difference, too.
These would all be beneficial as you get things sorted out and start paying yourself from the funds.
posted by rockyraccoon at 6:24 AM on May 12, 2020
I have separate accounts and I pay myself from the business account. This is called an owner's draw. Separating them can be done anytime. Basically, the two kinds of money will no longer be interchangeable.
If you have an LLC it can add to your legal protection and it certainly makes documentation easier. It adds a mental separation and clarity that has made a big difference, too.
These would all be beneficial as you get things sorted out and start paying yourself from the funds.
posted by rockyraccoon at 6:24 AM on May 12, 2020
The amount of info I gathered is your profits would be business revenue and taxed as such except you dont have many profits . Your "income" would have been is that profit. You will be given a loan to offset your income and instead of usual Business loans rates your payback will look like your normal quarterly estimates tax payments.
posted by The_imp_inimpossible at 10:28 PM on May 12, 2020
posted by The_imp_inimpossible at 10:28 PM on May 12, 2020
Best answer: Easy part first. Business loans are not income and are not subject to tax and the repayment is not a business expense. Interest on business loans is a deductible expense and reduces business income like any other business expense would. Assuming you are a sole proprietor, this is sort of kicking the tax down the road — you won’t pay tax on it now, but you have to pay it back without counting it as an expense in future, so it is effectively taxed then.
PPP forgiveness is currently a contentious tax topic. The law says PPP forgiveness is not taxable, which should be definitive, but the IRS said that the things you spent the PPP money on that was forgiven cannot be counted as a business expense. By not permitting it to be an expense, you are effectively paying tax exactly the same as you would if the money was taxable. Congress has vowed to fix this, but who knows? As of today, you have to consider the PPP forgiveness to be taxable, but as someone said above, all of this is still fast moving.
As a Schedule C person, there is effectively no difference between “the company’s tax” and your tax because in effect you and the company are essentially the same tax entity. I’m not a tax person, but I do my own taxes on a Schedule C company and very closely oversee my wife’s LLC as an S Corp taxes. We took the PPP for her LLC and I’ve read extensively on the subject and attended several Zoom seminars hosted by our accountant. I don’t hang out here all that frequently, but I’d be willing to share links or try to answer questions in thread or via PM.
posted by Lame_username at 6:34 PM on May 13, 2020
PPP forgiveness is currently a contentious tax topic. The law says PPP forgiveness is not taxable, which should be definitive, but the IRS said that the things you spent the PPP money on that was forgiven cannot be counted as a business expense. By not permitting it to be an expense, you are effectively paying tax exactly the same as you would if the money was taxable. Congress has vowed to fix this, but who knows? As of today, you have to consider the PPP forgiveness to be taxable, but as someone said above, all of this is still fast moving.
As a Schedule C person, there is effectively no difference between “the company’s tax” and your tax because in effect you and the company are essentially the same tax entity. I’m not a tax person, but I do my own taxes on a Schedule C company and very closely oversee my wife’s LLC as an S Corp taxes. We took the PPP for her LLC and I’ve read extensively on the subject and attended several Zoom seminars hosted by our accountant. I don’t hang out here all that frequently, but I’d be willing to share links or try to answer questions in thread or via PM.
posted by Lame_username at 6:34 PM on May 13, 2020
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I AM NOT A TAX EXPERT. This is what I have been told by friends who are struggling with the same questions. I tell you this as a lead for your own research. One person with whom I would speak would be the banker arranging the loan. They understand the limitations, restrictions, etc. I would also talk to a tax professional. It is worth the cost to talk to someone who KNOWS.
posted by AugustWest at 8:31 PM on May 11, 2020 [2 favorites]