Paycheck Protection Program Loan Borrowers Will Find Deductions Under the Tree This Holiday Season

By and
December 22, 2020

On the evening of December 21, 2020 the House and Senate passed the Consolidated Appropriations Act, 2021 (the “Act”), a 5,593 page bill that funds the federal government for the next fiscal year and provides long anticipated COVID-19 pandemic relief to individuals and businesses.  President Trump is expected to sign the legislation shortly.

It is hard to believe that the first COVID-19 relief legislation (the CARES Act) was enacted on March 27, 2020, because it seems like it has been around forever.  A significant piece of that legislation was the Paycheck Protection Program (PPP), a loan program under Section 7(a) of the Small Business Act.  The Act will make some significant changes to PPP, including providing for a “second draw” of PPP loans.  The PPP changes are found in the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” which is part of the Act.  For this post, we will focus on changes in the PPP for existing PPP borrowers (i.e. those who obtained PPP loans prior to the first closing of PPP on August 8, 2020).

    1. The Act clarified that any part of a PPP loan that is forgiven is not included in gross income, and that lenders are not required to file information returns reporting loan forgiveness (the IRS had already issued guidance to this effect).
    2. Overruling an IRS position (which we covered here IRS Re-Affirms PPP Expenses are Not Tax Deductible), and a nice present under the tree with a big bow, the Act provides that otherwise deductible expenses paid with proceeds of a PPP loan that is forgiven can be deducted by the borrower in the year in which the expenses were incurred.  Also, the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness.   This long sought relief will simplify year end for calendar year borrowers and fiscal year borrowers that are working on last year’s tax returns, who might have otherwise had unexpected taxable income due to the loss of some significant deductions.
    3. PPP loan proceeds can be used (and forgiveness can be sought) for additional items (provided loan forgiveness has not already been granted):
    • Covered operation expenditures (payments for software, cloud computing, and other human resources and accounting needs);
    • Covered property damage costs (costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance);
    • Covered supplier costs (expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the PPP loan that are essential to the recipient’s operations at the time at which the expenditure was made); and
    • Covered worker protection expenditures (PPE and adaptive investments to help the borrower comply with federal or state health and safety guidelines between March 1, 2020 and the end of the national emergency declaration).

As a reminder, the requirement that at least 60% of the PPP loan be used for payroll costs is still in place, even with these new non-payroll permitted expenditures.

    1. PPP borrowers can elect a covered period ending at the point of the borrower’s choosing between 8 and 24 weeks after origination.  This flexibility with respect to the covered period was unclear under earlier guidance.  Explicit permission to end the covered period early (for example once all proceeds have been expended) will lessen the impact on forgiveness of workforce changes and other financial activities which occurred after the covered period.
    2. The Small Business Administration must issue a simplified, one page forgiveness application for loans under $150,000 within 24 days of enactment.  Borrowers using the new form will be asked to describe the number of employees the borrower was able to retain because of the covered loan, the estimated amount of the loan spent on payroll costs, and the total loan amount.  The borrower must also attest that the original application certification was accurate and that the borrower complied with all PPP requirements.  SBA will be prevented from requiring any additional materials from such borrowers (although the borrower is required to retain the documentation to support any certifications).
    3. Within 45 days of enactment SBA must submit to Congress a report detailing SBA’s review and forgiveness audit plan to mitigate risk of fraud and provide monthly reviews and audit updates thereafter.
    4. Employer-provided group insurance benefits, other than health, are now included in covered payroll costs.  This includes group life, disability, vision, and dental.  So long as the SBA has not yet ruled on the borrower’s forgiveness application, it appears these additional expenditures can be added to the request for forgiveness.
    5. The Act clarifies that a business or organization not in operation on February 15, 2020 is not eligible for an existing or new PPP loan.  There have been news reports of borrowers obtaining PPP loans that did not even exist at the time of the loan application.
    6. Borrowers that returned all or part of their PPP loan can reapply for the maximum amount of loan otherwise available provided they have not received forgiveness.  The SBA is required to issue guidance on this.

Clearly the ability to deduct PPP expenses is the most significant take away from the Act for for-profit PPP borrowers.  The exclusion from taxable income of the loan forgiveness really didn’t have the same impact if the borrower couldn’t deduct the expenses from taxable income.

Ruder Ware continues to advise PPP borrowers on forgiveness applications (and those pesky Loan Necessity Questionnaires).   Contact us for assistance with your PPP questions.

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