On December 21, 2020, the U.S. Congress overwhelmingly passed a $900 billion coronavirus relief bill which provides for a number of new and extended stimulus measures and a second round of Paycheck Protection (PPP) loans. The bill also makes it clear expenses paid for using PPP loans that were forgiven are fully deductible for federal tax purposes. The bill was signed by the President on Sunday.
The bill renews funding in the amount of $284 billion for another round (PPP2) of loans for first- and second-time borrowers. The bill expands loan eligibility to 501(c)(6) non-profit organizations and includes loan set-asides for very small businesses (10 or fewer employees) and community-based lenders.
Businesses who previously received a PPP loan can receive another loan provided they have fewer than 300 employees, have used or will use the full amount of their first PPP loan, and can show at least a 25 percent decline in gross revenue in any 2020 quarter compared with the same quarter in 2019.
As with the first round of PPP loans, borrowers can receive a loan determined on 2.5 times of average monthly payroll costs in the year prior to the loan or calendar year. However, the maximum amount of loan has been reduced from $10M to $2M.
In addition to the costs eligible for loan forgiveness in the first PPP loan, the bill expands expenses paid to comply with Covid-19 federal and health safety guidelines, supplier costs and certain operating expenditures. It also allows all borrowers to choose a covered period ending at any point between eight and 24 weeks after the PPP loan origination.
For loans of $150,000 or less, the bill provides for a simplified loan forgiveness process. Specifically, borrowers will need to complete a one-page form with a certification of the number of employees retained because of the loan, the estimated amounts spent on payroll costs and the total loan amount.
The bill also repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
Businesses that received the first and second PPP loans and receive loan forgiveness do not have to include the forgiven amount in taxable income. In response to questions regarding the deductibility of expenses funded with forgiven loan proceeds, the IRS released a notice stating that no tax deductions would be allowed. Thus, creating a tax liability that struggling businesses were unable to afford.
In the bill, Congress clarified that its original intent was to allow a tax deduction for expenses funded with the PPP loan. Thus, expenses paid with both first and second round PPP loans are fully deductible for federal tax purposes. California enacted AB 1577 which specifically requires taxpayers to reduce their deductions for expenses paid for using PPP funds that were forgiven.
RINA’s professionals will continue to watch as the IRS and other agencies release regulations and procedures based on the just-passed legislation. We invite you to contact RINACARESTeam@rina.com for further information and assistance.