The IRS has clarified that if your loan money is forgiven, it won’t be considered taxable income. BUT, nor will it be eligible for tax deductions, even though you likely used it for expenses that normally would be tax deductible. This will leave you with a tax liability. For example, if you received $100,000 and the entire loan was forgiven, if your corporate tax rate is 21%, you would owe $21,000 in taxes. While the loan provides much needed cash, it’s not “free money,” you definitely need to plan for the taxes you will owe on this amount – unless any further changes are made to the guidelines. Any portion of your loan that is not forgiven is a loan – so that is a liability and not subject to taxation.
The short answer is that we don’t know yet if the up to $10,000 received in the form of an Economic Injury Disaster Loan (EIDL) is taxable. The IRS will surely issue more guidance on this specific situation. Applying existing tax law, it is likely that it will be non-taxable under the “general welfare exception.” And it is also likely that you won’t have to reduce your deductible business expenses by the EIDL advance amount.
Stay tuned! We will share guidance from the IRS and SBA on this and all related topics – and help you make sense of it all – as soon as it becomes available.
Do you have any other questions or concerns in these challenging times? We are here to help small business owners. From tax planning to strategies to get your business back on track, call or email to talk to our experienced accountants.