On December 27, 2020 President Trump approved the $900 billion Covid-19 Relief Bill. The bill could significantly reduce your 2020 taxes and provide additional relief in 2021. The key provisions of the legislation as we understand them are below. These could change over the next several weeks as guidance is published by the SBA and US Department of Treasury.
Expenses paid with forgiven PPP loans are now deductible
The bill specifies business expenses paid with forgiven PPP loans are tax-deductible. This provision applies to loans under both the original PPP and subsequent PPP2 loans. Borrowers who have their PPP loan forgiven will be able to deduct their payroll and other qualifying expenses that they used their PPP funds on.
The legislation also states that emergency EIDL Grants and Advances, which are considered forgiven and, in most instances, do not need to be re-paid, are also not taxable to the small business borrower.
More relief for hardest hit businesses comes in the form of a 2nd Paycheck Protection Program (PPP2)
Very similar to the first round of PPP but also has several differences. PPP2 is available to first-time qualified borrows and to businesses that previously received a PPP loan. Previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 of fewer employees,
- Have used or will use the full amount of their first PPP loan
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019 (if applying in 2020 you can use Q1, Q2 or Q3 comparisons; Q4 maybe be used if applying in 2021).
- PPP2 will permit first-time borrowers from the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Not-for-profit, including churches
- Accommodation and food services operations (NAICS codes starting with 72) with fewer than 300 employees per physical location
The maximum loan amount is 2.5X average monthly payroll costs in the one year prior to the loan or the calendar year, or $2 million. Entities with NAICS code 72 may receive loans up to 3.5X average monthly payroll costs, not to exceed $2 million.
The bill includes additional PPP expenses that are eligible for forgiveness:
- Payment for software used for cloud computing and other human resources and accounting needs
- Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance
- Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the borrower’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
- Expenses related to protective equipment and adaptive investments to help a borrower comply with COVID-19 related federal and state guidelines
Plus, these same costs from the first PPP issuance: payroll, rent, covered mortgage insurance, and utilities. To be eligible for full forgiveness, borrowers will have to spend no less than 60% of the funds on payroll over covered period of 24-weeks.
Necessity is Still a Factor –
Key consideration: The necessity test is still part of the application. A borrower will have to attest to the need for the PPP2 loan and certify that the “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Treasury published the following key guidance earlier this year to help applications with filing of the first PPP –
- On April 23, 2020 Treasury released FAQ 31. Under the guidance, applicants had to consider their access to alternative sources of liquidity before certifying the “necessity” of the PPP loan. The FAQ states: “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
- On May 13, 2020 Treasury released FAQ 46. The guidance stated: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
What remains unclear is if FAQ’s 31 & 46 will apply to PPP2. If they do, we will need guidance on how that interpretation will apply if a borrower had a PPP1 of $1.1 million and then obtained a PPP2 in the amount of $1.2 million. Although each loan is not over the limit on an individual basis, they are over the $2 million on an aggregate basis.
Business with PPP loans of $150,000 or less can use a simplified forgiveness process
The bill simplifies the forgiveness application process for loans of $150,000 or less. Eligible businesses can use a one-page application and a certification from the business owner stating the funds were used properly and are eligible for forgiveness.
The bill also repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount
Relief to individuals
- Economic impact payments of $600 for individuals making up to $75,000 per year and $1,200 for married couples making up to $150,000 per year,
- $600 payment for each child dependent,
- $300 to extended weekly unemployment benefits – December 26th until March 14th, 2021
- An extension of the employee retention tax credit,
- 100% business expense deduction for qualifying meal expenses incurred after December 31, 2020 and before December 31, 2022.
Disclaimer: The information available to us is changing rapidly & key questions remain about the Emergency Coronavirus Relief Act of 2020 and specifically the PPP2 loan provisions. Although the information we provide is based on our best judgment about what we know at this time, portions could already be outdated. We encourage you to check in with us for additional insights and updates. We will continue to provide you with general relevant information as we identify it, and we are here to help interpret it, however because each bank’s interpretation will be different, and that could also differ from SBA guidance, you are solely responsible for understanding and applying the Paycheck Protection Program loan rules to your business situation.