Congress clarified some of the confusion regarding Paycheck Protection Plan loans with the $900 billion COVID-19 economic relief package agreed to on Sunday.
The new legislation contradicts the IRS’ earlier interpretation that businesses would not be allowed to deduct for expenses paid with forgiven PPP dollars. The measure also provides millions more in relief funding for small businesses, including performance venues.
The PPP loans were originally understood to be eligible for tax-free forgiveness if at least 60% of the money was spent on payroll. But a few months into the process, the IRS announced that expenses paid with the other 40% of the loan could not be deducted on 2020 tax returns, asserting that recipients would be receiving a double benefit by deducting expenses paid for by the government.
“Even for larger businesses that are really struggling, that could make life really tough,” said Joshua Mullins, CPA and partner with Edmond-based Arledge & Associates during Friday’s JR Now webinar. “If I’m a business and I got a PPP loan and now those deductions aren’t taxable anymore, well then you just created a taxable income for me that I wasn’t expecting.”
Lawmakers responded to requests from businesses nationwide that the issue be rectified in the next round of relief funding and expanded the list of expenses eligible for deduction that can be paid with forgiven PPP loans.
The bill includes $284 billion in forgivable loans for businesses and expands eligibility to nonprofits, local newspapers, television and radio broadcast companies. A portion of the funds are to be set aside for very small businesses, minority-owned and women-owned businesses, which did not receive as much as some larger businesses during the original round of relief funding.
Small businesses with up to 300 employees that can show a 30% revenue loss in any quarter of 2020 may be eligible for a second round of PPP funding. Another $20 billion in Economic Injury Disaster Loans is set aside for businesses in low-income areas.
Unlike previous relief packages, Sunday’s agreement includes $15 billion for live performance venues, independent movie theaters and cultural institutions.
“We’re thrilled that Congress has heard the call of shuttered independent venues across the country and provided us a crucial lifeline by including the Save Our Stages Act in the COVID-19 Relief Bill,” Dayna Frank, board president of the National Independent Venue Association, said in a statement issued by the NIVA.
Though the relief is welcome, the PPP loans may make filing taxes in the upcoming year a challenge. Businesses that still have a PPP loan on the books may have to get permission from the bank or even escrow the entire amount of the loan before selling the business, Mullins said, suggesting that business owners consult with their accountant to determine the best course of action.