PPP Expense Deduction Reinstated With New COVID-19 Relief Bill
This article has been updated since original date of publication.
There can be no doubt that 2020 has been a year codified by unrest and uncertainty. It has been a difficult year, and the IRS did no favors opining that deductions, which support Paycheck Protection Program (PPP) forgiveness, were not deductible.
Fortunately, the latest round of COVID-19 relief legislation, the Consolidated Appropriations Act, 2021, passed by Congress on Dec. 21, 2020 and signed into law by the president on Dec. 27, 2020, reinstates the deduction which was clearly intended at the onset of the program. Furthermore, it confirms that PPP forgiveness warrants a basis increase (as tax-exempt income). These provisions should serve to bolster cash positions of many businesses still largely affected by the coronavirus pandemic as we enter 2021.
PPP Round 2
While the legislation contains several provisions related to the original PPP, it introduces a second round of funding to qualifying borrowers. The requirements are more rigid this time around as borrowers will have to show a significant decline in gross revenue (amongst other criteria) to qualify. Key provisions are as follows.
- Borrowers cannot have more than 300 employees.
- Borrowers must demonstrate a decline in gross receipts of at least 25% as compared to any quarter in 2019. Importantly, borrowers need only show it meets this test for a single quarter. (Special rules apply to calculating gross receipt reductions for nonprofit and veterans organizations.)
- Excluded from the definition of eligible borrowers: specific business concerns outlined in Section 120.110 of Title 13 of the Code of Federal Regulations (i.e., banks, finance companies, life insurance companies, among others). Separate provisions also exclude business concerns engaged in political or lobbying activities and those that have defined ties to the People’s Republic of China (and the Special Administrative Region of Hong Kong).
- Irrespective of the Section 120.110 exclusion, nonprofits and religious organizations are eligible.
- Many 501(c)(6) organizations are now eligible. However, they are subject to additional criteria.
Maximum Loan Amount
- Loan amount is: (Average monthly payroll for one-year period prior to loan date or average monthly payroll for calendar year 2019) * 2.5 with a maximum loan size of $2 million. Borrowers elect whether to use calendar year 2019 or the applicable one-year period.
- In the case of NAICS 72 entities (hospitality industry), the factor is 3.5, but still limited to a maximum loan amount of $2 million.
- There are special rules for seasonal and newly formed businesses.
- The covered period to utilize PPP loan proceeds is between eight and 24 weeks. Borrowers can choose anytime within this window.
General Provisions: Original PPP and Round 2
- For PPP loans of $150,000 or less there will be a streamlined one-page forgiveness certification.
- The new legislation broadens the definition of eligible expenses to include covered “operations expenditures,” “property damage costs,” “supplier cost,” and “worker protection expenditure.” Notably, this broadened definition does not apply to borrowers that have already submitted a forgiveness application on an original PPP loan. The 60% payroll cost limitation still applies, limiting the impact of this broadened definition.
- Economic Injury Disaster Loan (EIDL) advances do not reduce PPP forgiveness (repeals CARES Act provision).
Other Tax-Related Provisions
Read KSM’s summary of selected tax-related provisions contained with this legislation.
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We will be sharing more information in the coming weeks. In the meantime, please reach out to your KSM advisor for questions, or complete this form.
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