COVID-Related Tax Relief Act of 2020 – Opportunities for PPP Loan Borrowers

The COVID-Related Tax Relief Act of 2020 signed by President Trump on Sunday, December 27, 2020, offers many opportunities for borrowers. More implementation guidance is expected from both the SBA and Treasury Department regarding unanswered questions and issues that will develop as the program is implemented but for now, borrowers should consider how they may benefit from these provisions.

  • Eligible expenses paid with forgiven PPP funds will be tax-deductible and loan proceeds will be nontaxable.
    • Note: California currently does not conform to this treatment
  • Streamlined forgiveness application for loans under $150,000. SBA will be issuing a 1 page forgiveness form with borrower certifications and no required salary reduction or full-time equivalent employee calculations.**
  • Existing borrowers that returned loan funds or did not correctly calculate the amount of their loan due to changing rules or confusion at the time of their application can now apply for these additional loan proceeds.**
  • New round of PPP loans ($284 billion) will be available for both existing borrowers and new borrowers. The program is anticipated to start in January. Existing borrowers must show a minimum 25% decline in gross receipts for one quarter in 2020 vs the same quarter in 2019 to qualify.
    • Maximum loan amount is now $2 million and will be based on 2.5 times 2019 payroll or 2020 payroll
    • Streamlined application process for loans under $150K
    • New category of ineligible borrowers: entities with ties to China. Entities that are more than 20% owned by an entity either formed in China or Hong Kong or that has “significant operations” in China or Hong Kong are not eligible for a PPP loan. Entities with a board member that is a resident of China are also no longer eligible for a PPP loan.
  • Borrowers can now qualify for the Employee Retention Credit retroactively to March 2020. Under the CARES Act, a borrower could not obtain a PPP loan and qualify for the Credit. The stimulus bill eliminates this prohibition.**
    • The same payroll costs cannot be used for both the Retention Credit and PPP loan forgiveness so borrowers should evaluate the eligible expenses being used to claim PPP loan forgiveness. If a borrower is eligible for the Retention Credit claiming less payroll costs for forgiveness and using those costs to claim the credit can increase cash flow while not impacting the loan amount forgiven.
    • Credit has been expanded to include employers impacted by Presidentially declared disasters (excluding the COVID-19 pandemic) such as the California wildfires. To qualify, the business must be inoperable due to the disaster.
  • The list of eligible expenses that can be used for loan forgiveness has been expanded. These expenses apply to borrowers with existing loans and any new loans to be issued. With a longer list of eligible expenses, more borrowers should be able to achieve full loan forgiveness.**
    • Note: Payroll costs must still be at least 60% of the forgiven amount
    • Payroll costs include wages, retirement benefits, group health insurance. Additionally group life, disability, vision, and dental insurance are now included.
    • Rents
    • Mortgage Interest
    • Utilities
    • Worker protection expenditures: PPE and costs to comply with COVID-19 federal health and safety guidelines
    • Supplier costs: An expenditure made by an entity to a supplier of goods for the supply of goods that (i) are essential to the operations of the entity at the time at which the expenditure is made; and (ii) is made pursuant to a contract, order, or purchase order (A) in effect at any time before the covered period with respect to the applicable covered loan or (B) with respect to perishable goods, in effect before or at any time during the covered period
    • Operational expenses for payment of any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions or accounting or tracking of supplies, inventory, records and expenses
    • Property damage costs: Costs related to 2020 public disturbances not covered by insurance or other compensation
  • EIDL grants will be non-taxable and will not reduce PPP loan forgiveness
  • The SBA made 6 months of loan payments to lenders on behalf of borrowers under certain loan programs. These payments will be nontaxable and the related fees and interest will continue to be deductible. SBA will make an additional 3 months of payments in 2021, capped at $9,000 per month.
  • Grants for shuttered venue operators (theater, museum, etc.) with the tax treatment consistent with PPP loans.
  • Caution: Owners of pass-through entities such as S-Corps, partnerships, and LLCs may be limited to deducting 2020 losses if they do not have sufficient “basis”. These losses may be partially attributable to eligible PPP expenses but “basis” for these expenses will not be created until the PPP loan is forgiven, and forgiveness may not occur until 2021. The IRS is expected to issue additional guidance.

**Provision not available to borrowers that have submitted their forgiveness application to lender.

Please contact us if you have any questions.