Congress passed the Consolidated Appropriations Act (the "Act") yesterday, which includes a new round of COVID-19 stimulus. President Trump is expected to sign the Act into law this week. There are several major items included in the package that impact the Paycheck Protection Program (PPP). We have summarized the major provisions below:
Deductibility of Expenses Paid with PPP Loan Proceeds
In our previous Client Alerts, we have noted that the Treasury Department had taken the position that taxpayers may not deduct expenses if, at the end of the taxable year, the taxpayer reasonably expects to receive forgiveness of the PPP loan based on those expenses. We had noted that this interpretation did not seem to follow the intent of the original law.
The Act makes it clear that expenses paid with PPP loan proceeds are 100% tax-deductible for federal income tax purposes. This applies to all loans under the program whether forgiveness has already been received or not and includes loans to be issued under the other provisions of the Act as discussed below.
Further, the loan proceeds, even though they are non-taxable, can be included as an increase in basis for pass-through entities.
Related Read: New Guidance on Tax Treatment of PPP Eligible Expenses
Availability of Additional PPP Loans
The Act provides certain hard hit businesses with the opportunity to obtain a second round of PPP funding of up to $2.0 million. To be eligible for these "second draw" loans, a business must:
- Employ not more than 300 employees;
- Have or will use the full amount of the initial PPP loan; and
- Can show a 25% reduction in gross receipts for any calendar quarter of 2020, as compared to the same quarter in 2019.
In addition, businesses that did not receive a PPP loan initially, returned all or part of their PPP loan or received a loan for less than the maximum amount, can apply or re-apply for a loan under the original provisions.
Finally, certain 501(c)(6) organizations are now eligible for a PPP loan under the original provisions.
Changes to the PPP Loan Forgiveness Rules
The Act makes several favorable changes to the PPP loan forgiveness rules.
- A simplified forgiveness process for loans of $150,000 or less has been added. A borrower shall receive forgiveness if they sign and submit a one-page form requiring certain certifications and information on the number of employees retained and the amount of the loan spent on payroll. The Small Business Administration has been tasked with developing this form within 24 days of enactment.
- Prior to this Act, a borrower was required to reduce the amount of the PPP loan forgiveness by any Economic Injury Disaster Loan (EIDL) advance. The Act repeals this provision and provides that provision for borrowers to be made whole if they received forgiveness with the amount of the EIDL advance deducted.
- The Act adds four categories of allowable and
forgivable expenses. These expenses include:
- Covered Operations Expenditures. Payments for business software, cloud computing and other human resources and accounting needs.
- Covered Property Damage Costs. Costs related to property damage due to public disturbances that occurred during 2020 and not covered by insurance.
- Covered Supplier Costs. Certain contractual expenditures to a supplier that are essential to a borrower's operations at the time the expenditure is made.
- Covered Worker Protection Expenditures. Personal protective equipment and other investments necessary to help a borrower comply with health and safety guidelines.
Further guidance will be needed in many of these areas. However, the Act is very favorable for small- and medium-size businesses suffering during the pandemic. We will share additional details on important provisions of the Act over the coming weeks and keep you posted as new developments occur. In the meantime, we will continue to work remotely to assist our clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.