Congress passed and President Trump signed the COVID-Related Tax Relief Act of 2020 (COVIDTRA). COVIDTRA includes updates on rules concerning the original PPP loans allowed under the CARES Act as well as allocating $284 billion to additional PPP loan funding for both first and potentially second-time borrowers.
Expenses paid with PPP loan proceeds ARE tax-deductible
The original CARES Act stated that any forgiven PPP loan was not taxable income to the borrower. However, in April the IRS issued Notice 2020-32, which stated that the payroll, rent, and utility expenses paid with PPP loan proceeds are not deductible. Thus, they effectively made the forgiveness taxable by taking away your expense deduction on the back end. We at CPA Consulting Group believed the IRS was wrong in their interpretation. Now COVIDTRA supports our position by allowing the deduction of all expenses paid with forgiven PPP loan proceeds.
Other original PPP rule changes
The SBA ruled that if you received both an EIDL advance and a PPP loan, then when you applied for PPP forgiveness, any amount of EIDL advance received would not be forgiven. This required you to repay that amount of your PPP loan. Congress changed this by allowing your entire PPP loan to be forgiven, regardless if you received an EIDL advance or not. In addition, Congress stated that EIDL advances are also nontaxable income. If you already applied for PPP forgiveness and your EIDL advance amount was not forgiven, it should be now. However, there is no current guidance from the SBA to banks on how this will work and what, if any, documentation you must provide.
If you have not applied for forgiveness on your original PPP loan, then there are two other minor changes. First, additional expenses are allowed towards forgiveness. These include operational expenses such as software or cloud computing services, expenses for processing or tracking of payroll, accounting, human resource services, and the tracking of supplies and inventory. It also includes property damage costs due to looting or civil unrest not covered by insurance (think big city), limited supply and perishable good costs, and Covid related worker safety expenditures. Second, if your loan was less than $150,000, the loan forgiveness process is simplified to a single page form to be supplied by the SBA within 24 days.
More PPP loan funding made available
Additional funding is available for those who did not receive a PPP loan and, possibly also for those who qualify for a second PPP loan. If you did not receive a PPP loan in 2020, you must meet the requirements for a loan and apply as outlined on our web page blogs dated March 28, 2020, and thereafter. If you did receive a PPP loan in 2020, you may qualify for a second loan if you meet certain standards. These are: 1) you employ 300 or fewer employees, 2) you already used or will use the full amount of your first PPP loan and 3) your revenue in any 2020 quarter is 25% less than your revenue in the same 2019 quarter.
The maximum loan amount is 2.5 times your average monthly payroll for either 2019 or 2020 unless you are in the hospitality and restaurant business. Then it is 3.5 times the average monthly payroll. However, no loan can exceed $2 million. There are also special rules for how you calculate the average monthly payroll for self-employed farmers and ranchers.
Like with the original PPP loans, they must be used to pay payroll, rent, utilities, and now the additional expenses listed above of your business over your choice of either an 8 or 24 week period. You must meet the same standards for full forgiveness, meaning you cannot lay off employees or cut employee pay. Finally, you will apply for forgiveness with the bank and provide documentation of all these.
We assume applying for the loan, using the loan proceeds, and applying for forgiveness will be like before. However, the SBA is yet to provide guidance on any of these standards, including the new standards required for a second PPP loan. We are expecting SBA guidance sometime this week but would not be surprised if it is delayed. According to conversations with local community bankers, the SBA has not provided them with guidance yet and nobody knows exactly when you will be able to apply for another PPP loan.
Other COVIDTRA provisions
Grants are available for closed movie theaters and other live venues. Additional $600 per person Economic Impact Payments are coming for persons who make $75,000 or less. Additional $300 per week supplemental unemployment benefits were approved. There is funding available to help those having trouble paying their rent, for the travel industry, and for colleges and schools. The credit for required paid sick and family leave due to Covid was extended to March 31, 2021, as was the employer retention credit. Information on both these credits is also available on our blog page.
Please visit our blog page for additional information on the original PPP loans and their forgiveness rules. In addition, call us to discuss or email us with any questions. We will inform you as we know more. Happy New Year!!