PPP Expense Deduction & the latest covid-19 relief bill

by Pugh CPAs

On Monday night, right before the clock struck midnight the Senate approved a second major stimulus package, as part of a larger bill that extends general government funding into the fall of 2021.  This law which President Trump is expected to sign shortly contains several tax provisions. We plan to send out  additional details on some of the other provisions soon, but we wanted to quickly call your attention to two major provisions, one of which may be very time sensitive requiring you to prepare now if you want to take action.  The bill includes a provision that will finally fix the long-awaited correction for recipients of the original Payroll protection loans – borrowers will be able to deduct the expenses on which the loan was expended.  This makes clear Congress’ original intent, and overrides guidance from the IRS that effectively made the loan forgiveness taxable.  So, the loan forgiveness becomes truly tax free.

Also included in this bill is a new round of payroll protection funding –with certain restrictions. This second payroll loan program also allows businesses who previously applied for and received a PPP loan in the first round of funding to qualify for this new round if they meet these restrictions:  

(1) They must have 300 or fewer employees,

(2) They must have used or will use the full amount of their first PPP Loan, and

(3) They must show a 25% gross revenue decline in any quarter of 2020 compared to the same quarter in 2019. 

Loans extended to second-time borrowers under this program will be limited to $2 million. For most businesses  the new PPP appears to operate under the same general requirements of the first loan program, i.e., loan amount of 2.5 months of average payroll, up to 24 week forgiveness period, and the requirement that 60% be used for payroll costs. With these further restrictions and more limited funding than for the first round of Paycheck Protection Loans, businesses who expect to seek a second PPP loan should begin analyzing these new requirements now to see if they qualify.

The following link also provides a summary with some additional general information on items included in the bill:  COVID-19 relief bill addresses key PPP issues (Journal of Accountancy)