Ring In The New Year With Great PPP News

By Philip Anthony

Want to start off 2021 with some good news?

There were a lot of holes and hiccups with the application of the previously passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act earlier in 2020. The newly passed COVID-related Tax Relief Act of 2020 was passed in late December and goes a long way in correcting some of the bad side-effects associated with the original law.

Let’s take a look at some of the more notable aspects of the new law:

Loan Proceeds Are Not Taxable

The COVID-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. In my opinion, this stance was nothing more than a terrible policy which would have only served to blindside the taxpayer with unexpected tax consequences. I was not the only one with this opinion.

Lawmakers shared my belief as well 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, miraculously, lawmakers actually did change the law prior to the end of the year.

The COVID-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.” Simply put, this means that those expenses paid with forgiven PPP loans 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.

The EIDL Advance Will No Longer Offset PPP, and Refunds are on the Way!

Most of the business owners that I have worked with who decided on accepting PPP loan funds also took advantage of the EIDL (Economic Injury Disaster Loan) advance. This was a 1-10k amount that was an advance on the actual EIDL funds that your business applied for. It was not necessary for the business to actually accept the loan for the advance to be administered and automatically forgiven. However, taking this advance threw a small fly in the PPP Loan forgiveness ointment. Before the passing of this new law, if you decided to accept both the PPP Loan and also the EIDL advance, the total forgivable amount of the PPP Loan was reduced by the amount of the EIDL advance.

For Instance: Your business accepted $1,000 in an EIDL advance. Your business also went to a lender and received $10,000 in a PPP Loan.

Even though you spent the entire 10k on forgivable expenses (i.e., payroll, utilities, etc.) and it would have otherwise been entirely forgiven, the forgivable amount now decreases to 9k. Meaning the business has to pay back that $1,000 amount accepted as an EIDL advance.

But the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” provides two critical changes to this outcome. First, it eliminates the “offset rule” for all PPP Loans, even those that have been forgiven already. Second, it requires the SBA (Small Business Administration) to put into place rules allowing lenders to return that EIDL amount to those borrowers who have already had their PPP loan forgiveness amount reduced.

What would that do to the situation above? It would mean that all 10k would be forgiven, and the business had already paid back the previously unforgiven amount of 1k, it will be refunded that amount by the SBA. This is wonderful news.

All of these changes were critical to helping fix a bad situation, and somehow they got it done. Hopefully, we can carry more of this momentum into the new year.