Congress and the Administration continue to negotiate the next economic stimulus package, including the next round of the Payroll Protection Program funding as we get closer to the end of 2020
Leadership in Congress and the Administration continue to negotiate the next round of economic stimulus legislation before the end of the year to help small businesses and individuals being hit hard by the pandemic. The primary focus has been on a $908B bi-partisan bill introduced by a group of Republican and Democratic Senators, and a $916B Administration proposal. Both include a second round of funding for the Payroll Protection Program (PPP). The bi-partisan proposal includes a provision regarding the deductibility of some business expenses paid by funds borrowed under the PPP that are ultimately forgiven.
The bi-partisan proposal outlines the provision for PPP and small business aid:
Paycheck Protection Program & Small Business
$300 billion to Small Business Administration
Funding to allow the hardest-hit small businesses to receive a second forgivable Paycheck Protection Program (PPP) loan.
- Eligibility would be limited to small businesses with 300 or fewer employees that have sustained a 30 percent revenue loss in any quarter of 2020.
- Small 501(c)(6) organizations that are not lobbying organizations and that have 150 employees or fewer, such as local chambers of commerce, economic development organizations, and tourism offices, would become eligible for PPP.
- Forgivable expenses are expanded to include supplier costs and investments in facility modifications and personal protective equipment to operate safely.
- Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with Congressional intent in the CARES Act.
- Loan forgiveness process is simplified for borrowers with PPP loans of $150,000 or less.
- Set-asides are included to ensure that smaller borrowers and underserved communities get the help they need, such as: for small businesses with 10 or fewer employees; for loans made by small community lenders, including Community Development Financial Institutions (CDFIs), credit unions, small community banks, Minority Depository Institutions (MDIs), and farm service lenders; and for the Minority Business Development Agency.
Funding for independent live venue operators affected by COVID-19 stay-at-home orders.
Extension of Section 1112 of the CARES Act, which provides payment of principal, interest, and associated fees on qualifying Small Business Administration (SBA) 7(a), 504 and microloans.
Funding for SBA loan products to increase guarantees on SBA 7(a) loans and reduce fees on 7(a) and 504 loans; provide loan subsidies for 7(a) loans; and provide Economic Injury Disaster Loan grant advances.
In a Dec. 3 letter addressed to the U.S. Senate majority and minority leaders and the leaders of the House of Representatives, several hundred national trade associations, including the AICPA, and many state and regional affiliates appealed to Congress to pass legislation this year reversing the IRS’s treatment of expenses paid by funds borrowed under the Paycheck Protection Program (PPP) that are ultimately forgiven. The AICPA and over 50 state CPA societies also sent a letter on the same day to the same recipients urging that PPP expense deductibility be included in any must-pass year-end legislation.
The IRS recently issued guidance (Notice 2020-32 and Rev. Rul. 2020-27) providing that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).
In the letter, the groups warned that “[t]he effect of this ruling is to transform tax-free loan forgiveness into taxable income, raising the specter of a surprise tax increase of up to 37 percent on small businesses when they file their taxes for 2020.”
The letter asked Congress to act before the end of 2020. “This tax will hit small business owners after their PPP loan has already been spent, and just as many states are re-imposing mandatory closures of thousands of businesses in the face of spiking numbers of COVID-19 cases,” the letter says.
The bi-partisan proposal deals with this by expanding the list of forgivable expenses covered by PPP proceeds to include supplier costs, investments in facility modifications and personal protective equipment needed to operate safely, indicating that this is “consistent with Congressional intent in the CARES Act.”
By Mark Friedlich, Esq., CPA.