The U.S. Senate and House of Representatives overwhelmingly passed a $900 billion COVID-19 relief bill on December 21, 2020 that provides $600 stimulus payments to individuals, adds $300 to extended weekly unemployment benefits, and provides more than $300 billion in aid for small businesses. It also added some much needed clarification of tax treatment of covered loan forgiveness.
While we have highlighted items that relate to the tax treatment of the forgiveness and other items of important note to our clients, a broader summary of the PPP-related aspects of the bill can be found here.
Tax Treatment of Covered Loan Forgiveness
Among other PPP-related provisions, the legislation provides that taxpayers receiving PPP loan forgiveness are allowed tax deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.
In March, Sec. 1106 of the CARES Act provided that PPP loan forgiveness would not give rise to taxable income. However, the Act was silent regarding the treatment of qualifying expenses giving rise to loan forgiveness. In April, the IRS issued Notice 2020-32, which stated that expenses incurred giving rise to PPP loan forgiveness would be nondeductible under existing statutes. The IRS further clarified in November with Rev. Rul. 2020-27 that expenses giving rise to PPP loan forgiveness would be nondeductible when paid or incurred if a taxpayer had a “reasonable expectation” of forgiveness.
Congress has now superseded previous IRS guidance, resulting in a two-part subsidy to taxpayers comprised of tax-free loan forgiveness and deductibility of expenses funded by loan proceeds and giving rise to forgiveness.
However, North Carolina has already indicated, via H.B. 1080, which was signed into law by Gov. Cooper in June, expenses paid using the proceeds of PPP loans that are deducted for federal tax purposes will not be deductible when calculating North Carolina taxable income.
Second Round of PPP Funds Available
This bill also provides for a second round of PPP funds, which is highlighted in the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (Title III of Division N of the bill). Important items to note from this bill include:
- Second-time borrowers must generally 1) have no more than 300 employees, 2) have used or will use all of their previously-received PPP money, and 3) report a 25% gross receipts decline in any 2020 quarter compared to the same 2019 quarter. A maximum of $2 million can be received.
- First-time borrowers can be 1) businesses with no more than 500 employees eligible for SBA 7(a) loans, 2) sole proprietors, independent contractors, and eligible self-employed individuals, and 3) nonprofits.
- With second-round lending, qualifying expenses have been expanded to include PPE/COVID-19 safety guideline costs, payments to suppliers essential to current operations at time of purchase, and technology operations expenditures. No less than 60% of the funds should be spent on payroll over the covered period to receive full forgiveness.
Simplified Forgiveness Application for PPP Loans
The simplified PPP forgiveness application has now been expanded from a $50,000 or less loan value to $150,000. As part of this provision, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length. This certification will include a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
If you have any questions about how this new legislation impacts you and your business, please contact your Smith Leonard advisor directly or email us.