You can now deduct expenses paid with PPP loans on your tax return. There’s also a new round of funding for additional PPP loans if your business is struggling. Read about what it means for you.

PPP Loan Expenses Are Now Tax Deductible

If you or your business received funds from the Paycheck Protection Program (PPP), the recently passed Emergency Coronavirus Relief Act of 2020 will help to dramatically cut your tax bill. Here’s what you need to know.

Background

The PPP program was created by the CARES Act in March 2020 to help businesses which were adversely affected by the COVID-19 pandemic. Qualified businesses could apply for and receive loans of up to $10 million. Loan proceeds could be used to pay for certain expenses incurred by a business, including salaries and wages, other employee benefits, rent and utilities.

If the business used at least 60% of loan proceeds towards payroll expenses, the entire amount of the loan would be forgiven.

The Dilemma

While the CARES Act spelled out that a business’s forgiven PPP loan would not be considered taxable income, the legislation was silent about how to treat expenses paid for using PPP loan proceeds if the loan was ultimately forgiven.

Congress intended for these expenses to be deductible for federal tax purposes. But since the legislation was silent on this issue, the IRS swooped in and deemed these expenses to be nondeductible.

There was considerable debate over the latter half of 2020, with Congressional politicians saying that their intent was that the expenses be deductible and the IRS saying “Too bad, they’re nondeductible.”

The Solution

Congress overruled the IRS’s position in the Emergency Coronavirus Relief Act of 2020. The bill officially makes deductible for federal tax purposes all expenses paid for using proceeds from a forgiven PPP loan.

The recently passed bill is more than 5,000 pages long, so stay tuned for updates as to how this new legislation affects your business.

More PPP Loan Funds Available For Small Businesses

There is additional money available from the Small Business Administration (SBA) for a new round of Paycheck Protection Program (PPP) loans courtesy of the Emergency Coronavirus Relief Act of 2020.

Here’s what you need to know:

Requirements to Take Out a 2nd PPP Loan

If you received PPP loan proceeds in 2020, and wish to apply for a 2nd PPP loan, here are the qualifications:

• Your business must have 300 or fewer employees
• Demonstrate a decrease in gross receipts of at least 25 percent in any quarter of 2020 compared to the same quarter in 2019.
• Have used or will soon use the entire amount of their first PPP loan

Requirements to Take Out an Initial PPP Loan

If you didn’t take out a PPP loan in 2020, but wish to do so now, you can still apply for a PPP loan.

For an initial PPP loan, your business must have been open on or before February 15, 2020 and have 500 or fewer employees or independent contractors for whom the business paid salaries, compensation and payroll taxes.

Loan Forgiveness for the New PPP Loans

As with the first round of PPP loans, the new loans are eligible to be entirely forgiven is certain requirements are met. There is even a simplified application for forgiveness If the loan being applied for is less than $150,000. The maximum amount of a new round of PPP funding is $2 million.

What you need to do: Contact your banker as soon as possible. The last day to apply for and receive a PPP loan is March 31. As with the first round of PPP loan funding, funds are limited are expected to quickly run out.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.