On Dec. 21, 2020, the U.S. Senate and House of Representatives overwhelmingly passed a $900 billion COVID-19 relief bill. On Dec. 27, then-President Donald Trump signed it into law. For the national Paycheck Protection Program (PPP), this overturns the IRS position that makes PPP proceeds taxable. Therefore, the income derived as a result of PPP loan forgiveness will not be taxable.
The law repeals the requirement that PPP borrowers deduct the amount of any Economic Injury Disaster Loan (EIDL) advance from their PPP loan forgiveness amount. At press time, it is not clear how those who have already applied and been approved for forgiveness will go back and have the EIDL advance forgiven.
In addition, there will be a new round of PPP loans for those eligible. To be eligible for a second PPP loan, the following will apply:
- Firms must have 300 or fewer employees to qualify.
- Firms that have an existing PPP loan will have used or will use the full amount of their first PPP loan.
- Firms must show a 25 percent gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
The COVID-19 relief law clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”
While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan.
In November, the IRS then expanded on this position by issuing Revenue Ruling 2020-27, which held that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness, on the basis of eligible expenses paid or incurred during the covered period.
Several business trade organizations disputed this interpretation of the CARES Act loan forgiveness rules, arguing that it was not Congress’ intent to disallow the deduction of otherwise deductible expenses. Congress has since agreed with that position, and the law has been changed.
GORDON owns PCO Bookkeepers, an accounting and consulting firm that caters to pest management professionals throughout the United States. He can be reached at firstname.lastname@example.org.