Accounting on Us
One of the many provisions contained in the Act was the deductibility of expenses paid with PPP loan proceeds. The answer many were hoping for was that Congress would say “Yes!" and indeed, that was the answer.
December surprise changes PPP landscape
PPP loan forgiveness update
Phillip R. McCollum, Jr., CPA, JD
2020 is in our rear-view mirror now but it wasn’t all bad. The year closed with well received news regarding Paycheck Protection Program (PPP) loan forgiveness. The Consolidation Appropriations Act (“the Act”) was signed into law on December 27, 2020. The Act included $900 billion in stimulus relief for the COVID-19 pandemic. One of the many provisions contained in the Act was the deductibility of expenses paid with PPP loan proceeds. The answer many were hoping for was that Congress would say “Yes!” and indeed, that was the answer! Here is some more guidance on the impact of the deductibility of those expenses for tax.
Tax Deductibility of PPP expenses
For federal income tax purposes, eligible expenses paid with PPP loan proceeds are deductible expenses for tax purposes. The IRS issued Notice 2021-02 on January 6, 2021 acknowledging the Act. The notice also made obsolete Rev. Rul. 2020-27 and Rev. Proc. 2020-51 issued in November 2020 by the IRS addressing the non-deductibility of the expenses. The CARES Act provided that the forgiveness of the PPP loan is not taxable to the recipient of the PPP loan so this is a win-win for the recipients of PPP loans.
Great news on deductibility but what else needs to be considered tax-wise?
What does remain a question is whether the states will conform to the federal tax treatment concerning the deductibility of the expenses made with PPP loans. As tax season 2021 unfolds, where the states land on this issue, especially Arizona since it seems it makes its decisions late in the game, should be monitored.
Other federal tax issues to be aware of are basis or at-risk limitations if the loan is not deemed forgiven at year end and implications on merger and acquisitions if forgiveness has not yet occurred. A detailed discussion of these topics is beyond the scope of this article. Please consult your Henry+Horne tax advisor on these items.
PPP Borrowers can now use Employee Retention Credits
The CARES Act provided for a payroll tax credit called the Employee Retention Credit (“ERC”) for employers that experienced a 50% drop in quarterly revenue. Not much attention was paid to whether or not an employer qualified for the ERC since a PPP loan recipient was not eligible to claim the ERC.
The Act changes the law to provide that borrowers of PPP loan funds are also eligible for the ERC! This provision is retroactive to 2020. A main caveat to be aware of here: a PPP borrower cannot use the same wages for PPP forgiveness and ERC.
Because of the availability of the ERC now to PPP borrowers, utilizing non-payroll costs for forgiveness may provide more access to the ERC. Further discussion on the improved ERC is outside the scope of this article. Additionally, guidance is to be forthcoming from the IRS, and we will monitor those developments.
There’s a lot to unpack with COVID legislation. You won’t want to do this alone. Please contact us with any questions. We are staying on top of developments in the PPP loan program and will keep you updated.
Phillip R. McCollum, Jr., CPA, JD, Partner, specializes in tax planning, consulting and compliance work for privately held businesses and their owners. He can be reached at (480) 839-4900 or PhilMc@hhcpa.com.