Congress announced yesterday that a new, $900 billion, COVID relief package is coming. This will include another round of Paycheck Protection Program (PPP) loans as well as a defined answer to a burning question for many, expenses paid for with forgiven PPP funds WILL be deductible!
As we discussed in an earlier article, found HERE, the PPP funds were not intended to be included in taxable income. However, the IRS stepped in and found a work around by not allowing ordinary tax deductions for expenses paid with tax free funds. This essentially resulted in the PPP loans being taxable which would have left many small businesses with a large tax bill for 2020. To the relief of many, Congress clarified that the deductions will still be recognized regardless of forgiveness, stating that was the original intent of the CARES Act.
In addition to the deductibility of expenses paid for with forgiven funds, the proposed bill also states that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied”. In short, the provision indicates that any income tax basis increase that occurs as a result of receiving the loan will not be lost upon forgiveness of that loan.
Another Round of PPP Funds
This new relief package will include $284 billion designated for another round of PPP loans for “Eligible Entities” who satisfy the “Necessity Test”.
The necessity test is meant to attest that a second round of funding is “necessary to support the on-going operations of the applicant”. For those receiving less than $2 million, the SBA has stated that they will not questions the necessity issue. Hopefully further guidance will be provided to clarify the necessity test.
Provided that the necessity test is met, to be considered an eligible entity, a business must meet the following requirements:
- Schedule C taxpayer, an LLC or other entity treated as an S corporation or partnership and;
- Must demonstrate that there was a 30% reduction from the gross receipts of the entity during the same quarter in 2019 and;
- For the purposes of this 30% rule, gross receipts will include all revenues from the normal operation of the business before subtraction of expenses but will not include amounts borrowed, including amounts received for PPP loans.
- There is no guidance yet on which quarters must be compared.
- The borrower must employ no more than 300 employees, or meet an alternative size standard.
A few other restrictions regarding eligibility for this second round of funding:
- There will be a maximum amount of new PPP loans for seasonal employers, new entities, and businesses with more than one physical location.
- Borrowers owned 20% or more by “Chinese Entities” are unable to receive a second PPP loan.
- Additional loans cannot exceed $2,000,000 per borrower.
- There must be at least 90 days between loans. Consideration for those who just got their first PPP loan funded.
Aid Focused on Small Businesses
- Funds for businesses that received the first round of PPP funds but can qualify for another loan if they can show significant losses in 2020 over 2019
- Funds earmarked for non-profits and news outlets that weren’t eligible in the first round
- $15 billion for live venues, independent movie theaters, and cultural institutions
- $20 billion for targeted grants through the Economic Injury Disaster Loan program through the Small Business Administration (SBA)
- Tax deductions for business meal expenses
- Funds earmarked for “very small” businesses and lending through community-based lenders like Community Development Financial Institutions (DDFIs) and Minority Depository Institutions (MDIs). This includes $9 billion in U.S. Treasury capital investments in CDFIs and MDIs and $3 billion for the CDFI fund to support low income and underserved communities.
As with the initial PPP loan, we expect updates, clarifications, and policies will be announced frequently over the next few weeks as the details are hammered out. We will continue to update you as the situation develops. If you have questions about your specific circumstance, reach out to our PPP team!