TAX ALERT |
Authored by RSM US LLP
There is an often-quoted saying from Winston Churchill that Americans will always do the right thing, only after they have tried everything else. For many Paycheck Protection Program borrowers, the ’right-thing’ has been to allow tax deductibility for covered expenses paid with PPP forgiven funds. While tax deductibility was said to be Congressional intent all along, the IRS and Department of the Treasury relied upon precedent and another often-quoted saying that readers of tax law are well familiar with – ‘If Congress had intended [to make PPP expenditures deductible] it would have said so.’
Congress has now said so. Contained within the Consolidated Appropriations Act, 2021, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Act) expressly provides that for all PPP borrowers, “no [tax] deduction is to be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income…” This legislative correction obviates several concerns that PPP borrowers had with respect to the lack of tax deductibility, especially the impact on a PPP borrower’s research and development credit computation or the impact on the qualified business income deduction for a pass through entity. For partnerships or S corporations, the Act instructs PPP borrowers to treat tax-exempt income from loan forgiveness as tax-exempt income for purposes of sections 705 and 1366 and that any increase in the adjusted basis of a partner’s interest under section 705 shall equal the partner’s distributive share of deductions from costs giving rise to loan forgiveness.
The amendment will be effective for taxable years ending after the date of enactment of the CARES Act (Mar. 27, 2020) and covers both first round and second-draw funding under the PPP.
Changes to the forgiveness process
In addition to the tax deductibility fix, PPP borrowers with loans under $2 million will welcome the new streamlined SBA loan forgiveness procedures. Presumably, PPP lenders will also welcome these changes.
PPP borrowers with loans of $150,000 or less will be able to attest, on a single-page form to be released, that they complied with PPP requirements.
Finally, the Act provides for additional eligible nonpayroll expenses, classified as covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures as forgivable costs and repeals the requirement that the SBA deduct an EIDL Advance from the PPP loan forgiveness amount.
Continued access to PPP
Borrowers that may have been shut out of the PPP prior to the Aug. 5, 2020 end date may be able to access the loan program under slightly revised terms. In addition, certain 501(c)(6) organizations and destination marketing organizations now have access, provided they meet certain employee count limitations as well as lobbying receipt/activity restrictions. Also gaining access to PPP are certain local newspapers and TV and radio broadcasters. However, under the revised terms the maximum loan size is $2 million.
Also included in the stimulus packages is a second-draw program intended for the hardest-hit PPP borrowers. As the calendar changes over to the first day of winter, some of the hardest-hit industries, such as restaurants or accommodations, may draw upon this additional funding as a lifeline through the colder weather. Under the second-draw loan program, a PPP borrower that has 300 or fewer employees and has had a decline in gross receipts of 25% or more during any quarter in 2020 as compared to that same quarter in 2019 may apply for additional funds. There are special rules for potential borrowers that may not have started a business during 2019 or 2020. The maximum loan amount under the second-draw program is $2 million and borrowers that received an initial PPP loan must have used or will use the full amount of the initial loan.
Small businesses in the restaurant and hospitality industries receive a benefit of being able to calculate their loan amounts based on 3.5 times the prior year average total monthly payroll (trailing 12 months or 2019, at election of borrower) rather than 2.5 times the average total monthly payroll. These entities with an NAICS code that starts with 72 (Accommodation and Food Services) can look at each physical location to determine the 300 or fewer employee limitation, but the total amount of all covered loans cannot exceed the $2 million maximum.
Congress is much clearer about ineligible industries in this Act, specifically detailing out the ineligible industries under SBA regulations 13 CFR 120.110. In addition, companies must not be a business concern or entity that has certain ownership or organization under of the People’s Republic of China or the Special Administrative Region of Hong Kong and/or must not retain as a member of the board of directors, a person who is a resident of the People’s Republic of China, or any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938.
Do you have questions or want to talk?
Fill out the form below and we’ll contact you to discuss your specific situation.
This article was written by Christian Wood, Chuck Freeman, Ryan Corcoran , Debbie Singer and originally appeared on 2020-12-22.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
LaPorte is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how LaPorte can assist you, please call 713.548.2034.