Earlier this week, Congress passed a major new COVID-19 relief bill (Consolidated Appropriations Act, 2021). The bill’s headline provisions include another round of stimulus payments and extended unemployment benefits for individuals, as well as funding for vaccine distribution. There are also major tax and financial provisions to help businesses hit hard by COVID-19.
The new bill is massive and complex, and as of this writing, its enactment into law remains uncertain. But it does contain some good news.
Deductions for PPP-related expenditures
The Paycheck Protection Program was a centerpiece of the original CARES Act. While the loans provided invaluable assistance for business, one problem that arose had to do with the deductibility and timing of expenditures made with PPP funds. Earlier in 2020, the IRS ruled that if a business had a reasonable expectation that its PPP loans would be forgiven, expenditures made with PPP proceeds were non-deductible. This treatment caused problems for some businesses (especially those with a fiscal year-end) because the disallowed deductions and the excluded income (from the PPP loan forgiveness) didn’t happen in the same tax year.
The new legislation overrides the initial guidance from IRS and explicitly states that expenditures funded with PPP proceeds will be deductible. So even though the loan proceeds will not have to be paid back and even though the forgiveness of debt income is not taxable, businesses will still be allowed to take deductions for expenditures they make with the proceeds. This provision is a major win for taxpayers.
The legislation also clarifies that when a PPP loan is forgiven, the non-taxable income will nonetheless increase an owner’s basis in their pass-through entity, which means that losses are more likely to be fully deductible by the owners.
Round Two of the Paycheck Protection Program
While many businesses are still waiting to apply (or waiting for approval of their applications) for forgiveness of their PPP loans from earlier in 2020, the new law provides a second round of PPP loans for some businesses and expands the types of entities that can apply for an initial PPP loan.
The new PPP provisions (as with the original) are complicated, but in general terms, a business that has used or will soon use all of its initial loan can qualify for a second loan. In order to qualify, a business must have 300 or fewer employees and must demonstrate a 25% decline in revenue in any quarter in 2020 when compared to the same quarter in 2019.
As with the first round of PPP loans, the amount of the loan is based on an employer’s past payroll costs. The loan amount is up to 2.5 times an employer’s average monthly payroll costs over a specified period, with a maximum loan of $2 million. (The loan amount for hotels and restaurants is 3.5 times average monthly payroll costs, with the same $2 million limit.) As with the first round of PPP loans, there are special rules allowing separate locations to be treated as separate businesses, as well as special provisions for businesses that weren’t in existence for the entire measurement period.
Some businesses that didn’t qualify or didn’t apply for the first PPP wave can also apply under the new provisions. The expanded eligibility list includes 501(c)(6) organizations and entities that were previously barred because they received other types of assistance from SBA or other government programs.
Once again, the uses of the PPP loan are restricted to certain types of expenditures, with at least 60% of the proceeds required to be used for payroll costs. Borrowers who don’t meet these criteria will face a reduction in the amount of loan forgiveness. Many of the other requirements from the first round of PPP have also been carried over to the second round.
Additionally, the bill includes provisions for streamlined forgiveness application procedures and reduced recordkeeping requirements for smaller businesses. These provisions should help ease the backlog in processing loan forgiveness applications.