Covid relief bill adds PPP tax breaks the Treasury opposed

Advisors

House Speaker Nancy Pelosi, D-Calif., leaves a meeting on Capitol Hill on Dec. 18, 2020.

Saul Loeb | AFP | Getty Images

Lawmakers extended an additional lifeline to small businesses in the next round of Covid stimulus: more forgivable loans and the ability to take a tax write-off for covered expenses.

Members of Congress reached an accord over a $900 billion rescue package on Sunday.

The measure includes $600 stimulus checks to most adults and each child, as well as a $300 weekly unemployment enhancement.

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There are also a series of provisions aimed at ailing small businesses.

In particular, Democrats said they would earmark $284 billion for forgivable loans through the Paycheck Protection Program, according to a joint statement from House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer.

Lawmakers also said that they would expand PPP eligibility to include nonprofits and local newspapers, TV and radio broadcasters.

The PPP was originally established in the CARES Act this spring. In all, about 5 million firms received some $525 billion in loans through the program.

Generally, borrowers are eligible for PPP loan forgiveness if they apply at least 60% of the proceeds to payroll. Partial loan forgiveness may be available to those who don’t meet this threshold.

Amounts that aren’t wiped must be repaid and are subject to an interest rate of 1%.

A second draw from PPP

A New York waiter sets a table in a plastic bubble outside the Olympic Flame Diner in Manhattan on Dec. 15, 2020.

Carlo Allegri | Reuters

Small businesses may receive a second PPP loan if they have fewer than 300 employees and can prove that their revenue has fallen by 25%, according to a summary from the House Small Business Committee.

The maximum amount for a second draw will be $2 million.

Publicly traded companies will be barred from participating, according to Republicans on the House Small Business Committee.

There’s no denying that small businesses are in desperate need of cash to keep their doors open.

Whether those business owners will have an appetite to borrow more money is a different story, said certified financial planner Dan Herron, CPA and principal of Elemental Wealth Advisors in San Luis Obispo, California.

“I don’t think clients want to do it again,” he said. “The continually moving goal posts, the lack of uniformity on forgiveness applications — it’s a pain.”

Forgiveness, deductibility and tax complexity

The legislation also creates a simplified forgiveness application for businesses that took PPP loans under $150,000.

Firms that received a cash advance through the Economic Injury Disaster Loan program also will no longer have to deduct the advance from their PPP loan forgiveness amount.

Finally, the relief package answers a burning question on the minds of borrowers: Yes, business owners can claim deductions for expenses covered by PPP loan proceeds

Appearing on CNBC’s “Squawk on the Street” Monday morning, Treasury Secretary Steven Mnuchin confirmed that Congress agreed to permit tax deductibility on those expenses.

The issue has been a contentious one. Forgiveness of the PPP loan is tax-free, but the Treasury and IRS have said that covered expenses aren’t deductible.

I don’t think clients want to do it again. The continually-moving goal posts, the lack of uniformity on forgiveness applications — it’s a pain.

Dan Herron, CPA

principal of Elemental Wealth Advisors

Allowing the deduction would create a double tax benefit, the agencies previously said. Treasury and the IRS said last month that business owners who “reasonably believe” their PPP loans will be forgiven can’t deduct the costs.

Meanwhile, tax professionals have said that blocking deductibility could saddle owners with higher taxes.

Though the ability to write off the expenses would be welcome news for small businesses, tax professionals are keeping an eye out for any limitations — or guardrails — Congress may place on firms wanting to deduct those costs.

The relief may be too late for small businesses that have already made fourth-quarter estimated payments.

“It’s going to be too little too late for some borrowers who already paid in as if they weren’t going to get deductions,” said Tony Nitti, partner in RubinBrown’s Tax Services Group. 

“They will still be grateful to have deductibility, but it creates some sticky planning issues as we get into the last few days of the year,” he said.

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