One of the topics both accountants and small business owners have been anxiously watching was whether or not Congress would act to change the deductibility of expenses paid with Paycheck Protection Program (PPP) Loan funds.
Good news! Within the Consolidated Appropriations Act, 2021 (CAA 2021), which was passed December 27, 2020, expenses were addressed, among other things.
Deductibility Clarification – Business Expenses Paid with PPP Proceeds
We won’t keep you in suspense. The CAA clarified that business expenses ordinarily deductible and paid with the proceeds of a forgiven PPP loan are tax-deductible. Additionally, the forgiven income will be treated as tax-exempt income.
The CAA made deductibility effective as of the date of enacting the CARES Act. This helps cover most expenses that would have been paid with the funds. The CARES Act predates the PPP.
CAA Impact on PPP – Second Draw Opening January
Ding, Round 3. The CAA 2021 marks the third update to the PPP. The Small Business Administration and Treasury Departments released that PPP reopens to community financial institutions the week of January 11, 2021, for new borrowers and reopens to second draws on Wednesday, January 13. The Program will open to all participating lenders shortly after.
The new round of PPP funding has $284.5 billion available through March 31, 2021, or until the funds run out. The Small Business Administration and accounting community have been frantically evaluating the new legislation to determine what is the same and where the changes are worth mentioning.
Here are the highlights:
- First dibs, specifically for minority, underserve, veteran, and women-owned businesses before the program open’s to existing borrowers who want a second draw on PPP.
- Eligibility is expanded to include a new list of organizations with under 500 employees.
- Available to borrowers in operations before February 15, 2020.
- Max loan is $10 million.
- Additional relief for borrowers whose NAICS code starts with 72, i.e., hotels or restaurants; could receive up to 3.5 average payroll costs.
- To be eligible:
- Have to use the full amount of the PPP proceeds previously received by the second draw’s anticipated date.
- Able to show a decrease of 25% of revenue or greater when comparing any quarter in 2020 to the same quarter in 2019.
- 300 employees or less.
- Max loan is $2 million.
- May receive loans up to 2.5 their average monthly payroll costs in 2019 or 2020. There is an annualized cap per employee of $100,000.
- Borrowers can set the loan’s covered period to the period that would best meet their business needs. The covered period must be between 8 and 24 weeks.
- Additional expenses are now covered (see below) for forgiveness.
- Calculations have been adjusted for seasonal businesses, new businesses, farmers, ranchers, and partnerships.
New guidance was released in three documents.
- Interim Final Rule – Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act (82 pages). The Journal of Accountancy stated this document consolidates eight months of the rules for PPP for first-time borrowers. It’s been revised with updates from the Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act, P.L. 116-260.
- Interim Final Rule – Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans (42 pages). The new guidelines for a second draw.
- The SBA’s commitment to making the first two days open exclusively to community financial institution applications – Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns (3 pages).
PPP Loan Forgiveness
This is important. How loan proceeds are spent will determine if the loan is forgiven. A minimum of 60% of the loan funds must be spent on payroll over the selected covered period to be eligible for FULL loan forgiveness.
Expenses paid with the funds from either the first or second draw are eligible for forgiveness if they are used on the following costs:
- mortgage interest
- covered supplier costs
- covered worker protection
- covered property damage costs
- covered operations expenditures
Covered expenses are costs that occurred during the covered period of the loan.
Simplified Forgiveness Application
For borrowers with loans less than $150,000, the SBA has been instructed to issue a new 1-page form for loan forgiveness. The form will require borrowers to attest:
- The number of employees retained due to the loan.
- Estimated total amount spent on payroll costs.
- Total loan amount.
The simplified forgiveness application certainly seems to be a decrease in administrative paperwork. Remember that you’ll still need excellent recordkeeping to estimate your totals.
The supporting records don’t need to be submitted with the form. However, the employment records need to be retained for 4 years. It’s stated the other documents only need to be kept for 3 years. Still, I’d lean on the side of caution and keep it all together for the full 4 years.
January is always an active month for tax updates, but this season is full of them! It’s enough to make your head spin. Thankfully, we’ve got you covered. As we gear up to prepare tax returns for 2020, we’re here to answer any of your questions regarding the recent legislative changes.
If you have questions, contact us here. We’re happy to help.