The U.S. Senate and House of Representatives have both passed a new COVID-19 relief bill, which was signed into law by President Trump. Among many other things, this bill addresses the tax implications of the Paycheck Protection Program (PPP). After almost a year of uncertainty and conjecture, we have some clarity about the taxability of PPP loan forgiveness and the deductibility of related expenses.
In the original CARES Act, Congress specified that any PPP loan forgiveness amounts should not be considered taxable income. The IRS subsequently issued related guidance under Notice 2020-32, Rev. Rul. 2020-27 and Rev. Proc. 2020-51. This guidance indicated that no deduction would be allowed under the Internal Revenue Code for an otherwise deductible expense if the payment of the expense was essentially made from non-taxable revenue sources. So, while the income was not taxable, the related expenses were not deductible. This decision was seen as an indirect way of making the forgiveness of PPP loans taxable.
This new bill specifies that business expenses paid with forgiven PPP loans should be tax-deductible, which resolves the disagreement between the original congressional intent of the CARES Act and the IRS’s position. The new legislation clarifies this matter further by stating that “no deductions shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion for gross income.” This change means that the expenses are deductible, and the previously issued IRS guidance is inapplicable and will be revoked.
The new legislation addresses the deductibility of expenses and provides clarification for flow-through entities by allowing PPP forgiveness to increase basis. The new legislation covers existing PPP loans and PPP loans made under this new COVID-19 relief bill. The bill totals over $900 billion in wide-ranging relief. Some key provisions include:
- Nearly $300 million in new PPP forgivable small business loans.
- Economic impact payments of $600 for individuals making up to $75,000 per year ($150,000 for married couples), as well as $600 for each dependent child.
- $300 per week federal unemployment supplement through March 14, 2021.
- Extension of the national eviction moratorium through January 31, 2021.
- Targeted relief for transportation, education, healthcare, entertainment, and other key industries.
Further Information on New PPP Loans
The following first-time borrowers are eligible:
- Businesses with 500 or fewer employees
- Sole proprietors and other self-employed individuals
- Nonprofit organizations, including churches
- Lodging and foodservice operators with fewer than 300 employees per location
Businesses eligible for repeat borrowing will:
- Have 300 or fewer employees
- Have used the full amount of their first PPP loan (if applicable)
- Show a 25% gross revenue decline for any 2020 quarter as compared to 2019
- 501(c)(6) organizations are eligible if they meet certain requirements.
- PPP borrowers may generally receive up to 2.5 times their average monthly payroll costs, whereas lodging and foodservice operators can get up to 3.5 times their average monthly payroll. Both are capped at a maximum of $2 million.
- Eligible covered expenses include payroll, rent, mortgage interest, and utilities as before. However, they will now include personal protective equipment, expenditures for essential supplies, software and cloud computing services, etc.
- EIDL advance amounts are no longer required to be deducted from PPP forgiveness.
- The bill specifies that business expenses paid with forgiven PPP loans are tax-deductible, which supersedes IRS guidance that such expenses cannot be deducted.
- Deferred payroll taxes can now be paid ratably through December 31, 2021, and not April 30, 2021.
For more information on this comprehensive bill and all its implications, please contact your CRI advisor.