On January 6, 2021, the Treasury Department and Internal Revenue Service (“IRS”) issued IR-2021-02, which provides guidance allowing the deduction of eligible expenses when such payment would result (or be expected to result) in the forgiveness of a Paycheck Protection Program (“PPP”) loan. This is a reversal of prior guidance issued in Notice 2020-32 and Revenue Ruling 2020-27, which disallowed the deduction of these expenses.
The reversal follows the enactment of the Consolidated Appropriations Act, 2021 (“the Act”), signed into law by President Trump on December 27, 2020. Among, other things, the Act provides long awaited clarification regarding the deductibility of eligible expenses, specifically: “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 provided.” This provision applies to both original and subsequent PPP loans.
The Act also makes certain changes to existing PPP loan (“PPP1”) and loan forgiveness provisions, and provides an additional $284 billion in aid for small businesses in a new round of PPP Loans (“PPP2”). Following is a summary of other key changes:
- The requirement that PPP borrowers must deduct the amount of the EIDL advance from the PPP loan forgiveness amount has been repealed.
- PPP allowable and forgivable expenses have been expanded to include certain technology expenses, covered property damage costs, certain supplier/vendor expenses essential to the business, and certain worker safety expenses.
- The forgiveness application process for loans of $150,000 or less has been simplified. Borrowers will now be eligible for forgiveness if they sign and submit a one-page certification form to their lender. Information expected to be requested on the certification form includes the number of employees retained due to the loan, estimated amount of the PPP loan spent on payroll costs, and the total value of the PPP loan.
A second round of funding is available to eligible businesses, both PPP2 loan borrowers and PPP1 borrowers. For first time PPP borrowers, eligibility is the same as prior PPP Loan borrowers that is, those with 500 employees or fewer and other eligibility requirements. In addition, eligibility for a PPP loan has been expanded to include local newspapers, television and radio stations, and housing cooperatives. For a second time borrower eligibility is limited as follows:
- Borrowers with fewer than 300 employees.
- Borrowers that have used or will use the full amount of their first PPP loan.
- Borrowers who can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
- The entity must have been in business by February 15, 2020.
- The maximum loan amount is $ 2 million, and with all outstanding PPP loans, the maximum is $10 million.
It is important to note that borrowers who returned all or part of their previous loan may reapply for the maximum amount applicable, and those that did not accept the full amount of a covered loan may request a modification to increase the amount of a loan to the maximum amount.