Section 278 of Subtitle B, COVID-related Tax Relief Act of 2020, clarifies that otherwise deductible expenses paid with proceeds of a PPP loan that is forgiven remain tax deductible.
the IRS clarifies that when a taxpayer satisfies all of the requirements (having qualified expenses during 2020) and expects to apply for forgiveness of the related PPP loan, those expenses aren't tax-deductible for 2020, even when the application for forgiveness isn't made until 2021.
The requirement to reduce debt forgiveness for reductions of full-time equivalent employees or reductions in salaries or wages has been waived for these borrowers.
President Trump signed legislation (S.4116) on July 4, 2020 extending the application deadline for Paycheck Protection Program (PPP) loans from June 30, 2020 to August 8, 2020.
Paycheck Protection Program loans were enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act.)
Certain businesses can apply for up to $10 million. If certain requirements are met, the loan principal will be forgiven, tax free. At this time, expenses paid using the loan proceeds are not tax deductible.
At this time $130 billion of $660 billion allocated hasn’t been committed for loans, yet.
If you haven’t been approved for a PPP loan and would like to apply, see your banker.
The SBA has issued new forms and updated its Paycheck Protection Program loan “final rules” for the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020.
One of the forms is a new one, simplified Form 3805EZ.
Here are URLs for the final rules and forms.
Under the Act, the “covered period” was extended from the eight-week period beginning on the date of the origination of a covered loan to 24 weeks. Borrowers that received PPP loans before June 5, 2020 may elect to use the original eight-week period.
The forgiveness requirement to use at least 75% of loan proceeds for payroll costs was reduced to 60%.
The forms reflect that a pro-rated forgiveness can apply if there is a reduction of the employee count by the end of the covered period.
The maximum payroll costs, including salary, wages and tips, eligible for the forgiveness for an employee is $46,154 with the 24-week covered period and $15,385 with the eight-week covered period.
The owner compensation replacement is calculated based on 2019 net profit. The amounts are 2.5/12 of 2019 net profit, up to $20,833, for a 24-week covered period and 8/52 of 2019 net profit, up to $15,385, for an eight-week covered period. Amounts for which a credit is claimed for qualified sick leave equivalent amount and qualified family leave equivalent amount aren’t eligible for forgiveness.
Remember up to 25% of loan proceeds used to pay otherwise tax deductible interest on mortgage obligations or personal property incurred before February 15, 2020, otherwise tax deductible rent payments on lease agreements in force before February 15, 2020 and otherwise tax deductible utility payments under service agreements dated before February 15, 2020 is eligible for forgiveness under the eight-week covered period scenario. Up to 40% of loan proceeds used to pay the same expenses is eligible for forgiveness under the 24-week covered period scenario.
Many more borrowers should be able to qualify for exclusion of their PPP loans under the new rules.
The Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was previously passed by the House of Representatives on June 3, 2020. President Trump is expected to sign the legislation.
Here is a URL for the text of H.R. 7010. https://www.congress.gov/bill/116th-congress/house-bill/7010/text
The legislation relaxes the requirements to qualify for forgiveness of Paycheck Protection Program (PPP) loans.
Here is a summary of key points:
- The time in which businesses that receive a PPP loan may count their expenses that qualify for loan forgiveness is extended from 8 to 24 weeks, and the period ends no later than December 31, 2020.
- Businesses that received a PPP loan before the date of enactment may elect to keep an eight-week period to count expenses that qualify for loan forgiveness. (A borrower might want to make this election because it paid the required expenses and can apply for forgiveness sooner.)
- The portion of the loan proceeds used to pay payroll costs is decreased from 75% to 60%. Under the language in the Act, if the business doesn’t use at least 60% of the loan funds for payroll costs, the loan doesn’t qualify for forgiveness. Congress is expected to pass a technical correction later to permit a sliding scale forgiveness if the 60% threshold isn’t met. This means up to 40% of loan proceeds may be used to pay rent expenses, qualified mortgage interest and utilities and still qualify for full loan forgiveness.
- Borrowers may use the earlier of the date 24-weeks after receiving the loan or December 31, 2020 to meet the requirement to restore their workforce and wages to pre-pandemic levels required for full forgiveness.
- Two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce were included in the legislation. (1) The borrower was unable to find qualified employees. (2) The borrower was unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions.
- New borrowers have five years to repay the unforgiven portion of the loan instead of two. Those who received loans before the date of enactment may extend the repayment term of the unforgiven portion of their loans from two to five years, if the lender and borrower agree. The interest rate remains 1%.
- Under the CARES Act, businesses that received a PPP loan didn’t qualify for delayed payment of employer taxes. That prohibition is repealed under the Paycheck Protection Program Flexibility Act.
This legislation should enable many more PPP loan borrowers to qualify for loan forgiveness. The Small Business Administration will have to update the forms that it just issued to apply for loan forgiveness.
If your business is one of the fortunate ones that received a PPP (Paycheck Protection Program) loan, now you need to deal with the next challenge: qualifying for forgiveness of the loan.
The SBA (Small Business Administration) has issued Form 3508, Paycheck Protection Program Loan Forgiveness Application, and Schedule A, Worksheet.
Here is a URL to download the application. https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application
The purpose of the form is to report the expenses actually incurred that qualify for loan forgiveness.
The form is submitted to the lender where you got the loan, NOT the SBA.
There is no due date listed to submit the form. Since the rules relating to PPP loans may be amended based on developments for “opening up” the U.S. economy relating to the COVID-19 pandemic, I suggest not hurrying to submit the form.
For example, a Salary/Hourly Wage Reduction is computed on Schedule A for a reduction in full-time equivalent employees that isn’t restored by June 30, 2020. I think there is a good chance the June 30, 2020 date will be extended if the reopening is slower than Congress initially expected.
An item that isn’t explained very well is self-employment income. Self-employment income isn’t a normal “payroll” type item. That information might not be available until the 2020 income tax return is prepared for the business or the business owner.
The “Covered Period” for covered expenses is the eight-week (56-day) period beginning on the PPP Loan Disbursement Date. For example, if the borrower received its PPP loan proceeds on Monday, April 20, the Covered Period begins on April 20 and ends on June 14.
Generally, covered expenses are incurred and paid during the Covered Period.
Payroll costs must be paid during the covered period (or Alternative Payroll Covered Period) or paid on or before the next regular payroll date. The Alternative Payroll Covered Period for borrowers with a biweekly (or more frequent) payroll schedule is the eight-week (56-day) period that begins on the first day for their first pay period following their loan disbursement date.
Remember payroll costs include wages, bonuses, tips, employer-paid health insurance, and employer-paid qualified retirement plan expenses. (https://www.govinfo.gov/content/pkg/FR-2020-04-15/pdf/2020-07672.pdf)
An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the the billing date is after the Covered Period. Eligible nonpayroll costs include (1) covered mortgage obligations (interest payments on business mortgage obligations on real or personal property incurred before February 15, 2020); (2) business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and (3) business payments for distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
The forgiveness for nonpayroll costs is limited to 25% of the total forgiven amount.
Consider having your CPA help you complete this form.
The IRS has issued guidance relating to the tax deductibility of expenses paid with a Paycheck Protection Loan that is forgiven. (Notice 2020-32. https://www.irs.gov/pub/irs-drop/n-20-32.pdf)
According to the CARES Act, the forgiveness of indebtedness is not taxable income. (CARES Act Section 1106(i).)
The CARES Act doesn’t specify whether the expenses are tax deductible.
A Paycheck Protection Loan is eligible for forgiveness when the proceeds are used for the following expenses during the 8-week “covered period” beginning on the the loan’s origination date (CARES Act Section 1106(b)):
- Payroll costs
- A payment of interest on a covered mortgage obligation
- A payment on a covered rent obligation
- A covered utility payment
The IRS reminds taxpayers that, according to Internal Revenue Code Section 265(a)(1), no deduction is allowed for any item that is allocable to tax-exempt income.
To receive tax-exempt income from the federal government and to be allowed a tax deduction paid using the income would be a double benefit.
Taxpayers and their tax return preparers should note that these items won’t be tax-deductible on their 2020 income tax returns.
On Thursday, April 23, 2020, the U.S. House of Representatives passed the Paycheck Protection Program an Health Care Enhancement Act.
Now that both houses of Congress have passed the legislation, President Trump says he will sign it.
The legislation adds $310 billion to funding for Paycheck Protection Loans, $50 billion for Economic Injury Disaster Loans and $10 billion for Emergency Economic Disaster Grants.
Banks are saying it’s likely these funds will be used for loan applications that are already in the pipeline.
Congress will likely soon revisit whether additional funding should be provided.
On April 21, 2020, the U.S. Senate passed the Paycheck Protection Program and Health Care Enhancement Act. The legislation would increase the authorization level for the Paycheck Protection Program from $349 billion to $659 billion, and increase the appropriation level for the PPP from $349 billion to $670.355 billion.
$30 billion of the increase is earmarked for distribution by community-based lenders.
It also increased the authorization level for Emergency Economic Injury Disaster Grants from $10 billion to $20 billion (maximum $10,000 grant for a business) and adds $50 billion for Economic Injury Disaster Loans.
Certain agricultural enterprises with not more than 500 employees are made eligible for PPP loans.
The House of Representatives is scheduled to pass the legislation on Thursday, April 23, and President Trump says he will sign it.
These funds are expected to be committed as fast as the initial amounts.
Congress will likely be revisiting funding for these loans again.
Here is a URL to the Bill that passed in the Senate. https://www.trsa.org/wp-content/uploads/2020/04/Bill-Text.pdf