The $900 billion stimulus package was passed into law yesterday. Here are the key highlights related to this legislation:
PPP Loan Forgiveness
As we had hoped, PPP loans of up to $150,000 will receive automatic loan forgiveness. The only condition for automatic forgiveness is the submission of a one page affirmation to the lender stating the funds were used for the correct purposes.
This will take some time for the lenders to update their systems and the process. There is plenty of time to submit verification for loan forgiveness. We’d recommend checking with your lender in three to four weeks if you have not heard anything from them regarding the updated PPP loan forgiveness process.
If you received an EIDL Grant from the SBA, there is now no reduction in your PPP Loan forgiveness amount. Previously you’d need to deduct the amount received from the EIDL Grant from your eligible PPP Loan forgiveness amount.
If you received a PPP Loan of greater than $150,000 the requirements for loan forgiveness remain unchanged by this legislation.
PPP Expenses and Taxes
You are now allowed to deduct the PPP loan expenses for tax purposes. Previously, PPP funds received and expenses against those funds would have been treated as a wash for tax purposes. You received the PPP Loan amount (increase in income) and spent the funds on payroll and other costs (increase in expenses). You are now allowed to deduct those expenses for tax purposes without having to recognize the PPP Loan funds received.
For our tax clients: If you have received PPP funds, you will likely receive a refund for 2020 taxes. We built our tax estimates on the guidance from the IRS that PPP loan expenses were not deductible for tax purposes. However, with this legislation, you can now deduct the PPP loan expenses as business expenses. This most likely means the taxes paid in for the year (based on your estimated 2020 net income before this bill was passed) will exceed the taxes you owe resulting in a refund.
There is no immediate action needed on your part. We’ll be in touch in regards to 2021 tax planning as well as provide guidance on options as we prepare your 2020 tax returns.
The bill also allocates funds for another round of PPP loans. There are a few changes to the eligibility for the loan as well as an expansion on qualified expenses.
If a business had a 25% decrease in revenue in any quarter of 2020 (compared to the same quarter in 2019), they are eligible for PPP funds.
Most businesses who were shut down or severely limited during the 1st (Jan-Mar) or 2nd quarter (Apr-Jun) of 2020 may be eligible for these funds.
The loan amount calculation is identical to the previous PPP Loan calculation.
Qualified PPP Loan Expenses
Previous Qualified PPP loan expenses (wages, rent, utilities, etc) remain unchanged
You can also use the second round of PPP funds for additional business expenses: business software or cloud computing. personal protective equipment (PPE), and other supplies deemed essential to continue business operations. (see US Chamber Guide to Emergency Loans linked below for more details)
PPP loan funds will be forgiven with qualified expenses and if the business maintains the same amount of Full Time Equivalent employees (FTE’s) compared to the same lookback period as the first PPP Loan.
60% of PPP Loan funds need to be spent on payroll costs for full forgiveness. The remaining 40% of expenses can be spent on other qualified expenses.
The covered period for this new round is 8-24 weeks. This means businesses will have up to 6 months to use these funds on qualifying expenses.