PPP Loans for Small Business: Round Two! Tax Deductibility and Simplicity Explained!Submitted by Miller Financial Group | Red Oak Iowa Financial Advisor on December 29th, 2020
Following months of negotiations, the two houses of Congress have finally come together to pass a second stimulus bill totaling over $900+ billion. Within the new bill, an additional $284 billion is designated toward a new round of Paycheck Protection Program (PPP) loans. With the new package, it also contains clarification spelling out that PPP loans will not be taxable when forgiven. This was a major point of controversy under the original PPP program contained in the CARES Act.
Clarity regarding the new tax provision and and an additional round of PPP funding are both welcome relief to business owners and their financial advisors. This type of tax relief was the original intention of Congress, despite the IRS and Treasury Secretary [Steven] Mnuchin originally declaring otherwise.
Under the new legislation, the amount of the PPP loans that are forgiven, will not be taxable to small business borrowers. That also applies to all existing PPP loans made under the original Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as the new second round of PPP loans.
Before this new legislation, the IRS guidance issued to small businesses said that PPP borrowers could not expense their wages and other qualifying costs that they had used to qualify for their loan to be forgiven. By originally denying this deduction, the IRS was effectively taxing the small business for its PPP loan proceeds.
Business owners, their CPAs and their financial advisors have been very concerned regarding the net effect of this original ruling and the predicament that it would cause for these small businesses. Unfortunately, this was a prime example of the bureaucrats not listening to what Congress truly had intended in the CARES act in regard to the PPP loans.
Now that President Trump signed the legislation into law as anticipated, a $100,000 PPP loan for instance, would now not need to be counted as income. In addition, the business could also deduct $100,000 in related expenses. For a business owner in the top income tax bracket of 37%, that is a potential savings of $37,000. The PPP loan would be treated more like a tax-free government benefit as it was originally intended.
This provision is very welcome news for small business owners. The only potential caveat, relates to potential restrictions that may be added on pass-through reductions, which are still unknown at this point.
Under this second round of funding, businesses, some nonprofit organizations, self-employed workers and independent contractors are among those eligible for the loans. Existing PPP borrowers may also apply for a second loan, as long as they can meet the following conditions: They must have experienced a 25% reduction in gross receipts from the same quarter in 2019, and have 300 or fewer employees.
For most businesses the PPP loan limit is $2 million per qualifying business. How much each business may qualify for is determined by taking its average monthly payroll in 2019 and multiplying it by 2.5. The bill is designed to fund two and one-half months of expenses.
For restaurants and food businesses, the bill utilizes a special calculation that provides them with a larger loan amount of 3.5 months of average monthly payroll. For example, if their payroll during the period was $100,000, a restaurant or other qualifying food business, you would qualify for a $350,000 PPP loan. All others would only qualify for $250,000.
To be able to secure a second PPP loan, a small business must now have 300 or fewer employees, down from the original 500 employee maximum for the first round. The business must have already used or planned to use its original PPP loan funding. Same as under the original program, the loan proceeds must be used over a period of 24 weeks. The funds first must be used for payroll, rent and mortgage expenses as before, plus this bill also adds some new items to the list of qualifying expenses which include operating expenses, and workplace expenses on items that protect employees from Covid-19, and covered property damage.
To qualify for a second round loan, a small business must also now certify that it has suffered a revenue loss of 25% or greater compared to the same quarter of the year in 2019. That is drastically different from the original qualification rules for PPP, which simply required the small business to state that economic uncertainty made the PPP loan necessary. The second-draw loans are forgivable, but 60% must still be spent on payroll costs.