Update on Second Round PPP and What to Expect
Last year was a bizarre year for businesses, due in large part to the COVID-19 pandemic and widespread state and local shutdowns aimed at combatting its spread. The Paycheck Protection Program (PPP) offered a much-needed lifeline to many businesses and their employees. However, as with any rollout of a massive government spending program, the tax impacts of receiving PPP funds only added to the confusion and turmoil for many businesses.
PPP: The Basics
The PPP works like this: small businesses (500 or fewer employees) are eligible for up to $10 million in government loans to help with covered expenses – primarily payroll, as the name suggests, but also mortgage, rent, utilities and some other expenses. As long as those PPP loans were used for qualified expenses, businesses could apply to have them forgiven.
Typically, forgiven debt is treated as taxable income. If you owe someone $1 million and they forgive that loan, you’re $1 million richer, and the IRS wants its cut of that. However, PPP loan forgiveness has been explicitly excluded from taxable income. That’s a pretty good deal for businesses that were able to take advantage of the loans.
What About the Businesses That Missed Out on the First Round?
But what about the many businesses that did not receive PPP loan forgiveness? Many businesses, for a variety of reasons, missed out on the loan forgiveness provision of the PPP for some qualified wage expenses. This means these businesses would repay loan proceeds used to pay qualified wages.
Fortunately, Congress, recognizing the complexity and timing issues that have made the tax impacts of the PPP complicated for small businesses, has provided another route for relief. As the IRS announced on its website:
Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
New Rules Offer Greater Flexibility
The new rules allow some greater flexibility in dealing with PPP funds. Although complexity and timing issues remain. The IRS acknowledged as much, stating, “We understand this might be difficult to implement so late in the timeframe to file your 4th quarter return. You do not have to use this limited 4th quarter procedure. You can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.”
The COVID-19 pandemic is far from over. Neither are the impacts to businesses, government attempts to mitigate those impacts and the associated tax implications. Treatment of PPP funds and the forgiveness of those funds remains a fluid issue, and small businesses should keep an ear to the ground and expect additional updates from both Congress and the IRS.
If you need help preparing your application, contact us as soon as possible. We will assist you in preparing for your loan, including forgiveness.
Steve Mangan | 02/04/2021