How does Relief Funding Affect Your Taxes?
How Relief Funding Affects Your Taxes
Introduction
Both the state of Texas and the federal government have worked diligently to help child care businesses make it through the pandemic. Much of this support has come in the form of needed cash funding. Many child care business owners have asked, “How will this funding affect our taxes?” The answer can vary a bit based on the specific program — this piece reviews the key points and programs. If you still have questions, you can email them to the Texas Workforce Commission Child Care Coaching Team at Coaching@eceBizCoach.org.
State Relief Programs
Most state relief programs, including the Texas Workforce Commission Child Care Relief Fund, provide funding to cover costs you have already had or will have soon. Basically, the state funds are “reimbursing” you for your costs.
The question often comes up: “If the state is paying these expenses, are they still deductible?” Yes, they are, but you also must report the income.
For example, Luz is eligible for Child Care Relief Fund support totaling $5,100. She uses costs from her utilities and rent to request the funds. When she does her year-end taxes, she can still report the utilities and rent as expenses deductible from her taxes. However, she also needs to report the $5,100 from the state as revenue.
This could lead to another question: “Will my taxes go up?” With the additional relief funding being income from the state, you are likely to have to pay more taxes, but only on the additional amount.
Let’s return to Luz. She made $40,000. Based on current tax rates, she would have paid the federal government $4,602.50 in taxes.
However, she needs to add the additional relief money she received. So now her total income is $45,100 (the $40,000 plus the $5,100 in state funds). This moved her up a tax bracket so now her tax bill is $5,712.
Luz’s tax bill did go up by $1,109.50 but she still had $3,990.50 remaining from the state funds she received (that is $5,100 – $1,109.50 = $3,990.50). So she ended up ahead, and will be able to help her business and family post-pandemic.
Paycheck Protection Program Loans
If you received a Paycheck Protection Program (PPP) loam to help you weather the pandemic, the tax implications are a little different. First, the loan revenue should not be included on your federal tax return; the forgiveness of the loan should not be included either. Also, you can still deduct the expenses you covered with your PPP. The state of Texas takes the same approach to taxation — the income and forgiveness on your PPP loan is not taxed and you can take the expenses as a deduction.
Employee Retention Tax Credit & Families First Coronavirus Response Act
You may have received the Employee Retention Tax Credit (ERTC) and/or the Families First Coronavirus Response Act (FFCRA) to help reimburse payroll expenses that you maintained while your business operations were impacted by the pandemic. These are refundable tax credits
to offset wages that were paid out.
The income from the credit is not taxable and should not be included in your gross income for federal tax purposes. If you received these tax credits for staff wages, however, you will need to subtract that amount from your total wages expense as it is not deductible.
In-Kind Supplies
In cases where you received these supplies (rather than a grant to buy the supplies), there may not be a tax liability for you, but you should consult with your accountant or tax preparer to determine the best way to record the donation.
Economic Injury Disaster Loans & Other Small Business Administration Loans
You may have received an Economic Injury Disaster Loan (EIDL). This loan is intended to help your business through a disaster — in this case, the COVID-19 pandemic. The EIDL had two components. First, an advance that was a grant to the recipient of up to $10,000. The advance is not taxable and should not be included in your revenue on your taxes. Second, the EIDL included an option for a loan. If you took this loan, it is traditional business debt. The debt is not deductible or taxable, but you can deduct your interest payments.
Funding Tax Treatment Comparison
|
FUNDING SOURCE |
TAX TREATMENT – REVENUE |
TAX TREATMENT – DEDUCTIONS |
|
Paycheck Protection Program (PPP) |
Not included, not taxable |
Expenses are deductible |
|
Employee Retention Tax Credit (ERTC)
|
Not included, not taxable |
Expenses are deductible but must be reduced by the amount of the credit received |
|
Families First Coronavirus Response Act (FFCRA) |
||
|
All other stimulus programs including CCRF |
Included and taxable |
Expenses are deductible |
Getting Ready for Tax Time
If you received pandemic support, it has likely been — and will continue to be — critical to the recovery of your child care business. Though it can increase your tax liability, it can still provide new income, even if you have to pay taxes on it. One way to anticipate these taxes is to set aside an amount of the new revenue that equals your marginal tax rate. If you are unsure, you could use the rate of 22% which is the most common in the US.
For example, if you received funding in the amount of $12,000 you could set aside 22% or $2,640 for tax time.
Disclaimer
The information contained here has been prepared by Civitas Strategies and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information are not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited. Only noncommercial uses of this work are permitted.
Copyright © 2023 Civitas Strategies, LLC
Questions?
If you have any questions, you can reach out to the Texas Workforce Commission Child Care Coaching Team at Coaching@ECEBizCoach.org or visit childcare.texas.gov.