Appropriations Law Addresses PPP Forgiveness, Tax Treatment
The Consolidated Appropriations Act (CAA), signed into law in late December 2020, allocated additional funding for forgivable loans through the Paycheck Protection Program (PPP) — for both first-time and so-called “second-draw” borrowers who’ve been hit by the economic effects of the COVID-19 pandemic. It also includes several critical provisions related to loan forgiveness and tax treatment that should be of interest to all PPP borrowers.
To qualify for full forgiveness of a PPP loan, borrowers must spend at least 60% of the funds on payroll over their covered period of between eight and 24 weeks. Under the CARES Act, which created the PPP, borrowers could apply the funds only to payroll, mortgage, rent and utility payments. The CAA expands the types of nonpayroll costs that can be paid with PPP funds to include:
- Covered operating expenses, defined as software or cloud computing services that facilitate business operations; product/service delivery; payroll processing; human resources; sales and billing; or accounting or tracking supplies, inventory, records and expenses;
- Uninsured costs related to property damage and vandalism or looting during 2020 public disturbances;
- Supplier costs pursuant to a contract, purchase order or order for goods, in effect before taking out the loan, that are essential to the borrower’s operations; and
- Worker protection expenses — such as personal protective equipment, ventilation systems and drive-through windows — incurred to comply with federal or state health and safety guidelines related to COVID-19.
In addition, the CAA establishes a simplified one-page forgiveness application for loans up to $150,000. Borrowers are required to certify the number of employees retained due to the loan, the estimated total amount of funds spent on payroll and the total loan amount. Borrowers must retain records documenting employment for four years and other records for three years.
The CAA also increases the amount that can be forgiven for borrowers who received Economic Injury Disaster Loan advances. It eliminates the previous requirement that borrowers deduct the amount of these advances from their PPP forgiveness amount.
The CAA tackles several tax-related questions that have popped up since the enactment of the CARES Act. For example, the CARES Act provided that a borrower doesn’t need to include any forgiven PPP proceeds in its gross income. Generally, forgiven debt is included as income from the discharge of indebtedness.
However, in Notice 2020-32, the IRS declared that no tax deduction was allowed for expenses that are otherwise deductible if they were paid with forgiven PPP amounts. The CAA overrules this controversial IRS guidance, allowing borrowers to reduce their taxable income by deducting such expenses.
The law also provides that loan forgiveness doesn’t reduce tax basis and other tax attributes. (Special rules apply to partnerships and S corporations.) This and the other tax provisions apply to both first- and second-draw loans.
Much, much more
The CAA contains numerous other provisions that may be relevant to real estate businesses. For example, it addresses depreciation of residential rental real estate, Empowerment Zones and employer retention tax credits. It also extends several popular tax breaks, including the New Markets Tax Credit and the Work Opportunity Tax Credit. We can help you take advantage of potential tax-saving opportunities.