The Paycheck Protection Program (PPP) is one of the ways the United States government helped small businesses during the pandemic. In 2020 alone, the program distributed over $500 billion in loans. Businesses that were struggling because of the COVID-19 pandemic had the option of using the Paycheck Protection Program.
The PPP loan was, therefore, the most popular way for small businesses to recover. There is no doubt that the PPP loan has been helpful for small businesses, but its tax implications have been confusing for most business owners. If you are wondering how the PPP programs work and if a PPP loan is taxable in North Carolina, then continue reading.
How do PPP loans work?
The Paycheck Protection Program (PPP) is one of the relief measures in the Coronavirus Aid, Relief, and Economics Security Act (CARES Act). The PPP loan program has been authorized to provide billions in forgivable loans to small businesses. The main aim of the PPP loan is to ensure employees remain on the payroll and fill gaps in mortgage interest, rent, supplier costs, and other related expenses.
The PPP was meant to assist both nonprofit and for-profit organizations to maintain their payroll during the COVID-19 crisis and to keep the economy afloat. Under the PPP program, the Small Business Administration (SBA) provides federally insured loans for the covered expenses.
How to get PPP loan forgiveness
You would benefit from the loan forgiveness if your business meets the eligibility requirements. If you had a PPP loan, it can be forgiven as long as you have used 60% of the loan on employee payroll costs. You are allowed to use the other 40% on rent obligations, mortgage interest, utility costs, supplier costs on essential goods, and personal protective equipment.
Forgiveness of the PPP loan is based on your continuing to pay your workers at the normal levels for eight to 24 weeks after getting the loan. If you are seeking PPP loan forgiveness, you have to fill in the applications and submit them to the private lender where you got the loan.
Are PPP loans taxable in North Carolina?
After the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) was passed into law, forgiven PPP loans are tax-exempt and not considered part of the taxable income. At the federal level, the forgiven PPP loans are tax-free, which is different from how such loans are normally treated. If your business received the Paycheck Protection Program (PPP) loan, it’s not considered income for federal income tax purposes. The expenses covered by using the PPP loan are also deductible under federal tax purposes.
Traditionally, that was not the case at the state level. In North Carolina, prior to June 2020, you would have to pay tax on forgiven loan proceeds.
The state, however, has taken steps to address the issue of forgiven PPP loans being taxable. North Carolina’s governor, Roy Cooper, signed House Bill 1080 to incorporate loan forgiveness under section 1106 of the CARES Act. Under the new Bill, North Carolina will improve cash flow for organizations that have been impacted by the pandemic. Therefore, North Carolina now joins the list of states that have to provide tax relief for small businesses with PPP loans.
Contact Our North Carolina Tax Attorneys
If you have questions about loan forgiveness or other business tax-related issues, contact our North Carolina tax attorneys today – call us at 919-816-2683 or fill out our online contact form to schedule a consultation with our team.