On December 21st, 2020, a new stimulus package was passed in both the House and Senate that would provide economic relief in many important areas. As of today, December 24th, 2020, the bill has not been signed by the President. We are unsure of whether or not the bill will be signed in its current state, or if there will be updates to meet some of the President’s demands. Despite all of that, let’s take a look at how the current bill would impact past and future recipients of Paycheck Protection Program (PPP) loans.
PPP Loan Tax Treatment Update
This is an important update that many business owners have been waiting for. Under the original language of the CARES Act passed earlier in 2020, business owners would not be able to deduct the expenses paid for with forgiven loan proceeds. While Congress had not intended for the loans to have negative tax implications, the language of the bill allowed the IRS to interpret it in a way that would disallow deductions for expenses paid for with any forgiven loan proceeds. The reasoning behind their interpretation was in-line with prior case law. They do not allow “double-dipping,” meaning you cannot get a tax deduction for something paid for with tax-free money.
Under the current bill, the language is corrected to specify that deductions are not to be disallowed when the loans are forgiven. This essentially handcuffs the IRS into allowing the double-dipping that has historically not been allowed. For business owners, this would be a huge tax swing for 2020 tax filings. Let’s say you received a $100,000 loan and are in the 24% marginal tax bracket. This change will save you $24,000 in federal income taxes.
PPP Loan 2nd Draws Available
For many business owners, the first round of PPP loans this summer were critical to their survival. However, as coronavirus cases have continued to rise along with government restrictions, many businesses are still struggling to get by. Included in this package is a second round of PPP funding targeted towards businesses with decreased revenues. In order to qualify for a second draw, businesses must be able to show that their revenues have declined by at least 25% in at least one quarter of 2020 when compared with the same quarter in 2019. If your business was not operating for all of 2019, you can compare one quarter in 2020 with any quarter in 2019 that you were operating.
The calculation to determine the amount of the loan you may be eligible for is the same as it was the first time around. You will need to calculate your average monthly payroll costs and multiply that figure by 2.5. However, if you are in the travel and accommodation industry (if your NAICS code on your tax return begins with 72), you are eligible for 3.5 times your average monthly payroll costs. This was included to help restaurants and travel businesses, who have been hit harder than most industries by the pandemic. If your business did not receive a PPP loan the first time around, you may be eligible for a first draw this time around. However, it is required that you were in business as of February 15th, 2020.
Simplification of Forgiveness for PPP Loans Under $150,000
While applying for and receiving a PPP loan was relatively simple, many businesses have been concerned about the forgiveness application process. This is especially true for businesses who received smaller loans and may not have access to the same resources as larger businesses. Included in this bill is a favorable change for recipients of PPP loans under $150,000.
With this change, the loan recipient will simply have to sign a certification stating how many employees they were able to retain because of the loan, estimate how much of the loan was used for payroll costs, and attest that they provided accurate information and will retain all necessary records. This is why many banks had been waiting to start accepting forgiveness applications. There had been a lot of talk that they would be simplifying this process for small businesses.
Changes to EIDL Grants & PPP Loan Coordination
In the early stages of the pandemic, many businesses were scrambling for funding from everywhere they could find it. Because of this, many companies received both an EIDL grant and a PPP loan. The EIDL grant was a $10,000 grant for companies in need. However, in the CARES Act, there were stipulations for companies who also received a PPP loan. It stated that companies that received both were required to reduce the amount of their PPP loan eligible for forgiveness by the amount of the grant they received. This would essentially mean that businesses who received the grants and the PPP loans would be required to pay back the grant.
However, in the new bill, lawmakers clarified that they did not intend for businesses in need to have to pay these back. They will no longer require a reduction in the amount of PPP loan forgiveness for companies who received these grants. This is a very favorable change for companies that received both.
Again, nothing is final as of right now. President Trump has not officially said he will veto the bill, but he has suggested that he does not support it. He is currently urging Congress to issue higher stimulus checks and cut spending in other areas. Lawmakers have until Monday to make a deal, otherwise a government shutdown will ensue. Stay tuned for more updates, and feel free to contact me with any questions you have.