Supporting small business: Navigating the aftermath of Covid-19 funding opportunities

Out with the old and in with the old (and the new!)

With a new year upon us, we continue to recognize the challenges small businesses face attempting to stay afloat amid the Covid-19 pandemic and meet their tax responsibilities. While many small businesses did not survive the pandemic, many have been able to bounce back and sustain through the availability of Covid-19 funding opportunities. At Thomson Reuters, we work to support small business by providing accurate and reliable information, informing the way forward on the navigation of regulatory change and complexity. 

The following chart lists some of the most notable funding opportunities available to small businesses, which are administered by the Small Business Administration, all of which expired in 2021. Businesses were entitled to all funding sources for which they met qualification. Therefore, some businesses could have received more than one or in some instances all funding sources listed below. 

During 2021, many small businesses had to grapple with spending funds according to program requirements, making sure to maintain the appropriate documentation, and avoiding double dipping – for example, making sure that wages on which the forgiveness of a PPP loan was received were not the same wages used to obtain the Employee Retention Credit or other payroll tax credits. 

Simultaneously, businesses had to focus on keeping the doors open and remaining in compliance with Covid-19 safety protocols. On one hand, the funding was a relief but on the other hand, it caused confusion and frustration for small businesses. For tax professionals, the funding opportunities presented an accounting nightmare and disruption to the normal way of servicing their clients. No more business as usual; this was ‘business unusual’.

A new year presents new challenges. Many small businesses that took advantage of Covid-19 funding sources in 2020 or 2021 - and their tax professionals - will find 2022 to be the year of navigating the tax impact of these funding sources, and the possibility of a Small Business Administration (SBA) or an Internal Revenue Service (IRS) audit. From a federal perspective, the tax treatment is clear, funds received are nontaxable and related expenses are deductible. However, at the state level, things get muddied.

At the federal level the above listed Covid-19 funding received by a small business is treated as non-taxable income and the related expenses are deductible. From a state perspective, some jurisdictions conform to the federal tax treatment while some treat the funds received as taxable income and the related expenses are deductible, and others treat funds received as non-taxable income and the related expenses as non-deductible. There is also the issue of the “timing” of when to recognize these items. Let’s not overlook the possibility of an SBA and an IRS audit as these two federal agencies continue to partner together to combat fraud in Covid-19 funding programs.

As the Covid-19 pandemic continues, and with the billions of dollars of funding received by small businesses just as Congress awarded billions of dollars to the IRS to ramp up enforcement activities, it will prove beneficial for small businesses and their tax professionals to gain a greater understanding of funding program requirements, be diligent in documentation, and engage in intentional and effective communication with one another.