Tax & AccountingDecember 21, 2020

Covid-19 Emergency Relief Package: Second Round of PPP and Deductibility of Expenses Paid for by Loan Proceeds

Covid-19 Emergency Relief Package: Second Round of PPP and Deductibility of Expenses Paid for by Loan Proceeds

After months of difficult, partisan discussions, Congress has agreed to the next Covid-19 economic relief package. At the time of this writing, the bill text has not yet been made public, but we have important details about small business relief, particularly provisions related to the next round of the Paycheck Protection Program (PPP).

  • Provides $284B to reopen and strengthen the PPP for first time and second time borrowers.
  • Creates a process for small businesses to receive a second PPP if they have less than 300 employees and can show a 25% revenue reduction.
  • States that the maximum loan amount for a second draw PPP will be reduced to $2M.
  • Increases the PPP loan amount for NAICS businesses (Accommodations and Food Service).
  • Creates a simplified PPP loan forgiveness application for loans under $150K.

-Borrower signs and submits a one-page certification that requires the borrower to list the loan amount, the number of employees retained, and the estimated total amount of the loan spent on payroll costs.

  • Strengthens lender hold harmless provisions for lending institutions.
  • Expands list of eligible expenses to include covered operations (software, cloud computing, and other human resources and accounting needs; property damage costs due to public disturbances that occurred during 2020 that are not covered by insurance; covered supplier costs; and covered worker protection expenditures (PPE).
  • Makes eligible 501c6s, destination marketing organizations (DMO), housing cooperatives, newspapers, broadcasters, and radio stations.
  • Repeals the CARES Act that requires PPP borrowers to deduct their EIDL Advance from their PPP loan forgiveness amount
  • Updates conflict of interest rules and prohibits publicly traded companies from PPP.
  • Provides a process for borrowers to request an increased loan amount if regulations were updated.
  • Codifies rules for faith-based organizations and churches to ensure eligibility remains intact.
  • Creates a farmer and rancher calculation.
  • Lawmakers indicated they reserved some of the PPP funds for “very small” businesses, as well as lending through community-based lenders and minority depository institutions.
  • Require the Small Business Association to write rules carrying out the small business relief programs “no later than 10 days” after enactment of the bill.

Business owners can deduct expenses paid for with PPP loans, which can be forgiven by the government without incurring a tax.

Over objections from Treasury Secretary Mnuchin and others, the bill clarifies that business owners can deduct expenses paid for with PPP loans, which can be forgiven by the government without incurring a tax. This would override IRS official guidance published, who have blocked businesses from writing off rent, utilities and other business expenses paid for with tax-free funds.

In Revenue Ruling 2020-27, the IRS stated that a taxpayer who received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act (“eligible expenses”) may not deduct those expenses in 2020 if, at the end of 2020, the taxpayer reasonably expects to receive forgiveness of the covered loan, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of 2020. This ruling applies if: (i) the taxpayer has applied for PPP loan forgiveness but the lender has not responded by the end of 2020, or (ii) the taxpayer has incurred eligible expenses, has a reasonable expectation of reimbursement in the form of forgiveness, and expects to apply for forgiveness in 2021 but has yet to apply for PPP loan forgiveness by 2020 year end. Therefore, no deductions for the eligible expenses are allowed on the 2020 income tax return. The IRS used the rationale that the tax code prohibits that sort of doubling up of tax benefits.

Lawmakers indicated that Congressional intent in the CARES Act was that business expenses paid for by PPP loan proceeds should be deductible. The bill would also allow deductions on second-round of PPP loans.

Next Steps

We expect that the Covid-relief bill will be passed by Congress and signed by the President. Following the release of bill text and passage of the bill into law, we will provide further details and guidance.

By Mark Friedlich, Esq., CPA.

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Mark Friedlich
Author at Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the principal international & corporate indirect taxation analyst for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a Managing Tax Partner at PricewaterhouseCoopers.