PPP loans are forgiven under new federal legislation, along with a second round of support

PPP loans are forgiven under new federal legislation, along with a second round of support

On 12/27 President Trump signed the legislation (H.R. 133) that sent businesses and individuals with additional COVID-19 relief.

The enactment of this legislation not only created another round of PPP money, but more importantly it ensures tax deductibility for business expenses paid with PPP loans. This clarifies that loan forgiveness is not considered taxable income and that expenses can be deducted.  The result is that businesses participating in the program are receiving a two-part subsidy including expense deductions and tax-free loan forgiveness.

Under normal circumstances forgiven debt is considered taxable income.

In addition, the new round of PPP loans (some are calling it PPP2), are available to businesses that received a loan earlier this year OR who have not yet applied for a loan. The PPP2 loans are also potentially forgivable if all the conditions are met.

To be eligible for loan forgiveness, PPP2 borrowers will have to spend no less than 60% of the funds on payroll over a period between 8 and 24 weeks – which are the same parameters as the original PPP loan program.

The Paycheck Protection Program (PPP) from the original COVID-19 relief bill (CARES Act) is one of the federal government’s cornerstone relief programs.  To date there have been 5.2 million approved loans amounting to $525 billion. The program, originally created in March, was extended to August of this year and then the most recently signed legislation renewed the program with another $284 billion.

The PPP provides loans intended to help small businesses—those with 500 or fewer employees—maintain their payroll, hire back any employees who were laid off, and cover applicable overhead expenses such as rent and utilities.

To legally qualify for a PPP loan, businesses had to self-certify a good-faith determination of need stating that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

The biggest issued with the original legislation is that the intent was for PPP loans not to be taxable but was not stated in the language of the bill.

Under Section 265 of the federal tax code, firms are prohibited from deducting expenses associated with income that is tax-free.  The original CARES Act legislation did not specify that PPP loans would be deductible, so the Treasury Department ruled that expenses paid for with PPP loans were not deductible.  For a more detailed discussion on this issue, read this article by the Journal of Accountancy.

Thankfully, Nebraska businesses do not have to worry about their tax liability regarding PPP loans now that there is clarity at the federal level. There was substantial debate on whether or not Nebraska should conform to the CARES Act tax provisions, which had an impact on the PPP loan forgiveness. Because Nebraska lawmakers successfully passed the CARES Act conformity provision, now the loans received in the Cornhusker State are also considered not-taxable.

Nebraska received a total of 44,072 PPP loans earlier this year. According to the August data, 91% or 39,886 of the loans were for under $150,000 whereas 9% or only 4,186 loans were for over the $150,000 level.

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