Businesses buoyed by coronavirus relief funding may face a new wave of uncertainty this tax filing season as rules about how that money should be reported on federal and state income taxes continue to shift.
Congress made coronavirus relief programs like the Paycheck Protection Program and the Shuttered Venue Operators Grant tax-exempt, while still allowing companies to deduct business expenses paid with the funds they received, effectively creating two layers of tax relief for struggling businesses.
But, not all states followed suit — and many have been inconsistent with the tax treatment of COVID-19 funding at the state level — causing confusion for businesses owners.
Here’s how various types of COVID relief funding may impact your 2021 business taxes. When in doubt, consult with a tax professional to decode any changes or nuances in your state’s tax code.
Paycheck Protection Program
Forgiven PPP loans aren’t taxable income as far as the IRS is concerned. And expenses that normally would be deductible are still deductible, even when paid with a PPP loan. But some states deviate from the federal code on one or both of these points.
In Utah, for example, forgiven PPP loans are considered taxable income on state returns. And in California, only private companies that experienced a 25% drop in gross receipts can deduct expenses paid with a PPP loan.
Other states altered their tax treatment of PPP loans and expenses in 2021, meaning businesses may need to file amended returns.
COVID-19 Economic Injury Disaster Loans
Funds lent through the Small Business Administration’s EIDL program aren’t taxed as income, says Armine Alajian, a certified public accountant and founder of the Alajian Group, an accounting firm with offices in Los Angeles and New York.
“EIDL loans are pure loans paid in 30 years at 3.75% interest. This is not taxable because it’s not income, it’s a loan to pay back,” Alaijan says. “The payments are not tax-deductible either.”
Businesses that received a targeted or supplemental EIDL advance don’t need to report those funds as income for federal tax purposes either. While those funds are technically grants, they are excluded from taxable income.
State and federal COVID Grants
Grants are typically treated as income on business tax returns. That’s not the case with two large-scale federal COVID grants: the Shuttered Venue Operators Grant and the Restaurant Revitalization Fund.
Money received through either program isn’t taxed as income on federal returns, and you can deduct expenses paid with your grant money. You may need to report these funds on your state taxes, though, as some states don’t align with the federal government on this.
State grants are a different story. These funds are often considered income on both state and federal returns, but some states have made exceptions for COVID-relief grants.
If you’re unclear on your state’s rules, check your tax documents and consult a tax professional, says Talibah Bayles, founder and CEO of Birmingham, Alabama-based TMB Tax & Financial Services.
“Be very intentional about looking at any 1099s you receive due to a grant,” Bayles says. That form will indicate if the grant is taxable. “If you have a 1099 and it is taxable, talk to a tax professional. What were the program requirements? Are there any nuances at the state level that would allow you to treat it as not taxable on the federal level?”
Employee Retention Credit
The Employee Retention Credit has gone through several iterations over the past two years, causing headaches and heartburn for many small-business owners.
Originally, business owners couldn’t double-dip on PPP and ERC. This was later amended, retroactively, so businesses that took out a PPP loan could claim the tax credit, just not on wages already covered by their PPP loan.
The amount of the credit also changed. Businesses could qualify for up to $5,000 per employee for wages paid between March 12, 2020, through the end of 2021. That figure changed to $7,000 per employee, per quarter, for wages paid from Jan. 1 through Sept. 30, 2021, making it a much more enticing option for small-business owners.
“I do think it is a gem for business owners,” Bayles says. “It’s a great opportunity for trying to positively impact your cash flow.”
The problem: Most small businesses don’t have payroll.
“Especially your solopreneurs or even single-member LLCs,” she says. “Most business owners don’t have a formal payroll or have themselves on a formal payroll, so it still leaves out a chunk of people that it was intending to help.”
Businesses that qualify and want to cash in on ERC changes retroactively will need to amend prior years’ tax returns to lower accompanying payroll expenses.
“You need to reduce the expense in the year in which you’re claiming [the credit], not the year you’re receiving it,” says Ryan Losi, a certified public accountant and the executive vice president of Piascik, an accounting firm headquartered near Richmond, Virginia. “The IRS says some [ERC] claims will take a year to process.”
That means business owners need to amend personal and business returns from the prior year without actually having cash in hand — and in their books — from the credit.
Advantages and Disadvantages of a Business Bank Loan
According to the Federal Reserve’s 2021 Small Business Credit Survey, banks remain the most common source of credit for small businesses — compared with options such as online lenders, community development financial institutions or credit unions.
You can use a business bank loan for a variety of purposes: working capital, real estate acquisition, equipment purchase or business expansion. To qualify for one of these small-business loans, however, you’ll likely need excellent credit and several years in business.
Before applying for a business loan from a bank, consider the following advantages and disadvantages.
Advantages of business bank loans
Flexible use of funds
Banks offer a range of different business loan products, including term loans, business lines of credit, equipment financing and commercial real estate loans, among other options. Unless you opt for a product that has a specific use case, like a business auto loan, for example, you can generally use a bank loan in a variety of ways to grow and expand your business.
When you submit your loan application, the bank may ask you to identify a purpose for the financing to evaluate the risk of lending to your business. Once you’re approved, however, the bank is unlikely to interfere if you change your intentions, as long as you make your payments. This flexibility is perhaps one of the biggest advantages when comparing debt versus equity financing.
Large loan amounts and competitive repayment terms
Bank loans are often available in amounts up to $1 million or more. Many online lenders, on the other hand, only offer financing in smaller amounts. Popular online lenders OnDeck and BlueVine, for example, both have maximum loan limits of $250,000.
Business loans from banks also tend to have long terms, up to 25 years in some cases. These loans usually have monthly repayment schedules, as opposed to daily or weekly repayments.
In comparison, online business loans typically have shorter repayment terms, ranging from a few months to a few years. Many of these loans require daily or weekly repayments.
Low interest rates
Banks typically offer small-business loans with the lowest interest rates. According to the most recent data from the Federal Reserve, the average business loan interest rates at banks range from 3.19% to 6.78%.
Although some online lenders can offer competitive rates, you’ll find that their products are generally more expensive than bank loans, with rates that range from 7% to 99%.
The interest rates you receive on a bank loan, or any small-business loan, however, can vary based on a number of factors, such as loan type, amount borrowed and your business’s qualifications, as well as any collateral you provide to back the loan. In general, the stronger your qualifications and the more collateral you can offer, the better rates you’ll be able to receive.
Relationship with a bank lender
Many banks provide ongoing support for their lending customers, such as business credit score tracking or a dedicated relationship manager to work with your business. Most banks also offer other types of financial products, such as business checking accounts, business credit cards and merchant services, if you prefer to use one institution for your financial needs.
Although some alternative lenders offer additional support and services, the Federal Reserve’s 2021 Small Business Credit Survey reports that businesses that receive financing are more satisfied with their experience with small banks (74%) and large banks (60%) compared with online lenders (25%).
Disadvantages of business bank loans
Intensive application process and slow to fund
To apply for a small-business loan from a bank, you’ll need to provide detailed paperwork that may include, but is not limited to, business and personal tax returns, business financial statements, a loan purpose statement, business organization documentation, a personal financial statement form and collateral information. You may have to visit a bank branch and work with a lending representative to complete and submit an application — although some banks offer online applications for certain business loan products.
The entire process, from application to funding, can take anywhere from several days to a few weeks, or even longer, depending on the type of loan and the bank. Some banks will also require you to open a business checking account with them before you can receive funds.
In comparison, alternative lenders typically have streamlined, online application processes that require minimal documentation. Many of these lenders also offer fast business loans — in some cases, funding applications within 24 hours.
Strict eligibility requirements
To qualify for a business loan from a bank, you’ll generally need strong personal credit (often a FICO score of over 700), several years in business and a track record of solid business revenue. Bank of America, for example, requires a minimum annual revenue of $100,000 for unsecured term loans and a minimum annual revenue of $250,000 for secured term loans.
Depending on the bank and the loan type, you may need to provide collateral, such as real estate or equipment, to secure your financing. Most banks will also require you to sign a personal guarantee that holds you personally responsible for the debt in the event that your business can’t pay.
Online lenders, on the other hand, have more flexible qualifications and some will work with startups or businesses with bad credit. To qualify for a business line of credit with Fundbox, for example, you only need six months in business, a credit score of 600 or higher and at least $100,000 in annual revenue.
Although online lenders may still require a personal guarantee, they’re less likely than banks to require physical collateral.
Find and compare small-business loans
Still trying to determine the right way to finance your business? Check out NerdWallet’s list of the best small-business loans for business owners.
Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.
What Are Typical Small-Business Loan Terms?
Small-business loan terms determine how long a small-business owner has to pay back their borrowed money, plus interest. Typical loan terms, also referred to as repayment terms, can vary from a few months to 25 years — it depends on your lender and the type of business loan.
You and your lender will establish a repayment schedule that shows how much you’ll pay per week or month. While reviewing repayment terms, consider eligibility requirements and annual percentage rates, which take into account interest rates and other fees associated with the loan.
Typical loan terms overview
Up to 10 years.
Up to six years.
Startups and businesses with smaller funding needs.
Up to 25 years.
Small businesses with good credit and available collateral.
Business lines of credit
Up to five years.
Short-term, flexible financing.
A few months.
Cash advances based on unpaid invoices.
Up to 10 years.
Business loan repayment terms
Term loans: Up to 10 years
Small-business term loans provide a lump sum of cash upfront that borrowers pay back over time. Online lenders and traditional banks offer them, and maximum amounts range from $250,000 to $500,000. Term loans fall into either the short-term or long-term category — for example, a long-term loan may have a repayment term of 10 years while a short-term loan from an online lender might only give the borrower from three months to two years to pay it back.
Microloans: Up to six years
Nonprofit, community-driven lenders offer microloans to small-business owners in specific regions and underserved communities. While smaller loan amounts typically mean shorter repayment terms (and this is true for some microloans), SBA microloans have terms of up to six years.
SBA loans: Up to 10 years for working capital and fixed assets; up to 25 years for real estate
SBA loans range anywhere from thousands of dollars to $5 million and generally have low interest rates. The maximum 7(a) loan term for working capital is 10 years, although according to the SBA, seven years is common. Borrowers have up to 25 years to pay off loans used for real estate.
Business lines of credit: Up to five years
With a business line of credit, small businesses pay interest only on the money that they borrow, and funds can be available within days. Some business lines of credit require weekly repayments instead of monthly repayments.
Invoice financing: A few months
Invoice financing provides businesses with a cash advance while they wait on their unpaid invoices. Like a business line of credit, invoice financing is a quick way to access cash and is one of the shortest-term financing options available. Terms mostly depend on how long customers take to pay their invoices.
Equipment financing: Up to 10 years
Equipment financing is used to pay for large equipment purchases, and then that same equipment serves as collateral. Terms vary and usually depend on how long the equipment you’re financing is expected to last.
What is a loan maturity date?
A loan repayment term describes how much time you have to repay the loan, plus interest; you might also hear this referred to as loan maturity. This is not to be confused with the loan maturity date, which is the final day of your repayment term. On the loan maturity date, the entirety of the loan and any extra associated costs should be paid.
What is a prepayment penalty?
Some lenders charge borrowers a fee for paying off their loan ahead of schedule. Typically, this is to offset the lost interest the lender expected to receive over the full term of the loan. For example, SBA borrowers with a 15-year-plus loan term are penalized for prepaying 25% or more of the loan balance within the first three years of their loan term. Check your business loan agreement to see if your lender charges this type of fee.
Equipment Leasing: What It Is, How It Works and Tax Implications
Equipment leasing is a type of financing that lets you use a piece of heavy equipment for a set period of time. It can be a good choice if your business only needs a piece of equipment temporarily or if the tool will become less useful as it ages.
But if you’re going to need to use a piece of equipment regularly for a long time, you may want to consider getting equipment financing and buying it outright.
What is equipment leasing?
With equipment leasing, you rent the equipment you need from an equipment financing company or another lender or vendor. When the lease is over, you return the equipment.
In some cases, you may have the option to buy the equipment at current market value or another agreed-upon price when your lease ends.
How equipment leasing works
The specific terms and costs associated with a lease will depend on your lender, the equipment you’re leasing, the length of your contract and more. But in general, here’s what you can expect.
Down payment: There is usually no down payment on a lease.
Lease payments: Payments may start low and then increase later in the lease term.
Collateral: You don’t need to provide your own collateral because the leased equipment fulfills that function. If you fall behind on payments, the lessor can just repossess the equipment.
The end of a lease: At the end of the lease, you can return the equipment or, if the lender allows, renew the lease or buy the equipment. If you want to end a lease sooner than you agreed to in your contract, you may owe a penalty.
What is a master lease?
A master lease lets you lease additional pieces of equipment from your lessor without negotiating new contracts for each one. A master lease can be a prudent choice for businesses planning for near-term growth.
Can you write off equipment lease expenses?
You can deduct equipment lease payments on your taxes as rent — as long as you actually have a lease, not a conditional sales contract.
The IRS doesn’t spell out specific definitions of “lease” or “conditional sales contract.” However, it says conditional sales contracts tend to contain provisions like:
After you’ve paid a certain amount, you’ll get the title to the equipment.
Your agreement says you have the option to buy the property for a nominal price, like $1.
The lessor counts some or all of your lease payments toward an equity interest in the equipment
Whether you can claim a depreciation deduction depends on what kind of agreement you have. If you have a lease, then the lender continues to own the equipment, so it gets claim tax deductions associated with depreciation. But if you have a conditional sales contract, you can take depreciation deductions.
Equipment leasing vs. equipment financing
Equipment financing is a means of buying equipment (not just renting it) using a specific type of business loan. The equipment serves as collateral for the loan, and if you default, the lender can seize it. Once your loan is paid off, you own the equipment free and clear.
When you lease a piece of equipment, ownership remains with the lender, and you lose access to the equipment when the lease term ends. In some cases, you may have the option to extend the lease or buy the equipment.
According to the Equipment Leasing and Finance Association, leasing is probably the better choice if:
You plan to use the piece of equipment for 36 months or less.
You don’t have cash on hand to make a down payment.
You want to keep monthly payments as low as possible.
On the other hand, buying might be the better choice if you plan to use a piece of equipment for more than three years and your business has the financial security to make a down payment.
How to find equipment leasing
Many companies that offer equipment financing also offer equipment leasing programs. If you work with a business lender already, you can start by asking if it offers equipment leasing.
Beyond that, consider these equipment lenders:
If you want to lease several pieces of equipment under the same contract: Bank of the West’s fixed-rate, fixed-term leases offer the option to pay monthly or quarterly and give lessees the chance to buy equipment when the lease ends. The bank also offers a lease line of credit that enables you to lease more than one piece of equipment using the same lease terms.
If you want the option to end your lease early: EagleBank allows lessees to end leases early without penalty or add equipment to leases at any time. EagleBank works in a wide variety of industries, from medicine to energy to publishing.
- If you want to work with a brand name you know: Wells Fargo offers leasing options for construction equipment, marine equipment, railcar equipment and IT equipment.
If you want the option to lease pre-owned equipment: National Funding offers leasing of new and pre-owned equipment; opting for the latter may help you get lower prices. National Funding also works with borrowers who might not otherwise qualify for equipment financing loans, focusing on those in the restaurant industry, medicine, farming, construction and office work.