New Forgiveness Rules for Past, Current, and New PPP Money
Good news: The new Paycheck Protection Program (PPP) law enacted with the stimulus package adds dollars to your pocket if you have or had PPP money.
Note that the PPP money comes to you in what appears to be a loan. We say “appears” because you typically pay back a loan.
Done right, however, the PPP loan is 100 percent forgiven. The word “loan” makes some businesses leery of this arrangement. Don’t be. The PPP monetary arrangement is a true “have your cake and eat it too” deal.
And this remarkable deal applies to your past PPP loan, the PPP loan you have outstanding, and the PPP loan you are about to get if you have not had one before. Here are the details:
Loan Proceeds Are Not Taxable
The COVID-19-related Tax Relief Act of 2020 reiterates that your PPP loan forgiveness amount is not taxable income to you.
Expenses Paid with Forgiven Loan Money Are Tax-Deductible
As you may remember, the IRS took the position that expenses paid with PPP loan forgiveness monies were not deductible.
Lawmakers disagreed but were unable to get the IRS to change its position. The IRS essentially told lawmakers, “If you want the expenses paid with a PPP loan to be deductible, change the law.”
And that’s precisely what lawmakers did. The COVID-19-related Tax Relief Act of 2020 states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”
In plain English, the expenses paid with monies from a forgiven PPP loan are now tax-deductible, and this change goes back to March 27, 2020, the date the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted.
Round 2: Additional Tax-Free PPP Money for You?
If you received an initial PPP loan, you can qualify for a second round (called a “second draw”) of tax-free PPP money.
To qualify for the second-draw PPP money, you must
- have 300 or fewer employees;
- have suffered a 25 percent or greater loss in revenue during at least one quarter of 2020 when compared to 2019; and
- have already used your original PPP money (or be planning to use it soon).
The mechanics of the second-draw PPP loan amount follow the rules that apply to the original (first-draw) PPP loan, with some modifications. The overall limits work as follows:
- The loans are capped at $2 million or less.
- If you are not a hotel or restaurant (NAICS code 72), you identify your average monthly payroll for either 2019 or the trailing 12 months and then multiply it by 2.5 to find your loan amount.
- If you are a hotel or restaurant, you multiply by 3.5.
During a period of your choice, beginning eight weeks from the origination date of the loan and ending 24 weeks after the origination date, you must use 60 percent or more of the monies for defined payroll in order to achieve 100 percent forgiveness.
Expenses that can qualify for forgiveness include the following:
- Interest on mortgage obligations
- Operations expenditures
- Property damage
- Supplier costs
- Worker protection
And finally, keep these three thoughts in mind:
- Act fast, because this money goes in a hurry.
- The incoming PPP loan monies are tax-free.
- Expenses paid with PPP loan monies that are forgiven are tax-deductible.
New Chance for PPP Monies
Did you miss out on your prior opportunities to receive tax-free PPP cash?
Many did miss out. Why? One reason: the word “loan.” Who wants a loan? No one. Well, almost no one.
But who wants a tax-free cash gift? If you do, read on for the details. But first, you should know that the big picture works like this:
- You obtain your tax-free PPP monies from a lender (it’s called a “loan,” but watch that word disappear as you read on).
- You spend all the PPP money on yourself if you are self-employed or operate as a partnership; on payroll (including pay to you, if that applies); and on other covered expenses such as rent, interest, utilities, operations, property damage, suppliers, and worker protection.
- You apply for loan forgiveness and achieve 100 percent loan forgiveness, which is easy when you spend 60 percent or more of the money on payroll (and yourself if you are self-employed or a partner in a partnership).
- You deduct the expenses that you paid with the PPP loan monies that were forgiven.
New Money on the Table
The new COVID-19 stimulus act sets aside $35 billion for first-time PPP applicants, with $15 billion of that made in loans for first-time applicants with 10 or fewer employees or made in amounts less than $250,000 to businesses in low-income areas.
The new deadline of March 31, 2021, replaces the expired deadline of August 8, 2020.
The monies available in this new round of PPP funding are on a first-come, first-served basis. Don’t procrastinate. Get your application for your first-time PPP monies in now.