The end of 2020 and start of 2021 has seen a whirlwind of COVID-19-related legislation to address the economic impacts to individuals and businesses. The following is the first installment of a multi-part overview of some of the broadly tailored programs to assist businesses and individuals affected by the COVID-19 crisis. Please keep in mind that there are industry-specific relief programs that may or may not be discussed in future installments, and the details of any of the programs discussed requires close analysis with your accountants, bankers, and legal counsel to insure the programs are right for you and your business.
Changes to the 2020 Payroll Protect Program
For borrowers who applied for and received Payroll Protection Program (PPP) loans in 2020 (“PPP 1.0”), referred to by the Small Business Administration (SBA) as “First Draw PPP Loans,” the recent Consolidated Appropriations Act of 2021 (CAA) includes some very important changes to be aware of.
One extremely important question for borrowers is whether or not expenses that were paid using forgiven PPP funds can be deducted on the borrower’s 2020 federal tax return. In 2020, Congress and the IRS went back and forth debating Congress’s intentions with its passage of the CARES Act, versus the IRS’s interpretation of the words that were actually used and the historical treatment of certain business expenses. The essential question was whether businesses were permitted to receive a double tax incentive of forgivable debt and a reduction of taxable income. The CAA leaves no uncertainty that normally deductible expenses paid using PPP proceeds are, in fact, deductible from federal income taxes. However, It’s important to note that certain states have not followed Congress’s clear interpretation, so businesses should work closely with their tax professionals to determine whether such expenses are deductible from state income taxes.
For those same borrowers who took advantage of the PPP 1.0 program, there are three other very useful pieces of information that should be closely reviewed: (1) if a PPP 1.0 borrower obtained an Economic Injury Disaster Loan (EIDL) and received a $10,000 grant, previously that grant was deducted from any PPP forgiveness amount. The CAA repealed this provision so that borrowers can retroactively be entitled to forgiveness of whatever PPP amount was not forgiven by virtue of its ties to the EIDL.
(2) Relatedly, certain PPP 1.0 borrowers may be eligible for an increase in their PPP 1.0 loan amount, depending on whether they qualify under the following categories:
- Businesses that received and returned PPP loans.
- Businesses that only accepted a portion of the full amount of the PPP loan they were approved for; and
- Businesses that would have been eligible for a larger loan than initially received had they applied under the 2021 expanded PPP guidelines. This is particularly relevant to food and accommodation businesses (those categorized with NAISC codes starting with 72) because such employers may be eligible for a maximum loan of 3.5 times their 2019 payroll expenses, rather than the original 2.5 multiplier set forth in PPP 1.0.
And most significantly, (3) the CAA provides that employers who received PPP loans may still qualify for the Employer Retention Tax Credit (ERTC) for wages that were paid in 2020 using forgiven PPP funds. For example, if an employer used PPP loan amounts to pay 50% of their 2020 fourth quarter payroll expenses, the employer can re-examine the remaining 50% of payroll expenses and theoretically apply for tax credits (or direct cash payments using IRS Form 7200) to cover some or all of that balance. As such, this third category could be very significant to employers, but requires careful accounting practices and a thorough understanding of the ERTC application process.
For businesses that did not apply for a PPP loan in 2020, the application window has been reopened for those businesses to apply for forgivable PPP loans under the original 2020 program. If approached promptly, such borrowers are also eligible to apply for a second PPP loan under PPP 2.0 (to be discussed in the next installment).
The next installment will discussion PPP 2.0 (those new PPP loans for 2021) and the expanded categories of permissible PPP expenses and forgivable expenses. Stay tuned. . .
The guidance provided above is general in nature and readers are encouraged to reach out to Neider & Boucher, S.C., or to their own legal counsel to determine the applicability of these issues to their own personal and/or business needs.