By: Scott Borsack
On December 20, 2020, leaders in the House and Senate announced that a deal had been reached on additional COVID-19 relief to individuals and businesses. We are breaking down the major changes and what they mean for your business.
IRS Policy Reversed – PPP Borrowers May Claim PPP Eligible Expenses as Income Tax Deductions
The new legislation will allow borrowers who paid for payroll and other tax-deductible expenses with PPP funds to claim these expenses as income tax deductions, thereby reversing IRS administrative policy. It is a win for taxpayers who got loans, which they used for deductible expenses and results in tax savings, depending on business form, of between 21% and 36% of the amounts spent on deductible expenses.
New PPP Round limited to Specific Potential Borrowers
There are vastly different new rules for applying to your lender for another Payroll Protection Program loan. The new rules will include the following:
- Borrowers will have to meet a necessity test and be able to demonstrate the loan proceeds were necessary for the borrower to keep its doors open. If your business managed to keep operating into the fourth quarter and you are now on the upswing, expect that these new rules will make it difficult if not impossible to qualify;
- In order to participate in this round the borrower will have to pass a new eligible entity test and will have to report its income and expenses on Schedule C of Form 1040, be a limited liability company, S corporation or partnership that meets the following:
- the borrower has suffered a reduction of 30% in gross receipts for the same quarter in 2019, but gross receipts won’t include the proceeds from loans, including PPP loans
- the borrower can have no more than 300 employees, but there will be an alternative size test
This new round is clearly meant for smaller business and those that are family owned and looks to exclude large well-funded entities who may have taken advantage of the original program.
Don’t File Your Forgiveness Application For Loans Under $150,000
The forgiveness process for loans $150,000 or less will be vastly simplified. Under this new provision, all that a borrower will have to do is complete a one page application in which they “attests that the eligible recipient complied with the requirements” of the CARES Act.
The one page application has not been created yet, and is not due to be crafted by the SBA until after the enabling legislation is enacted.
If the promise of a one page application is true to its Congressional advertising, a borrower may only need to provide some basic demographic and loan information and sign a certification without submitting all the analysis.
Word to the wise – make sure you can prove entitlement to forgiveness and keep all of your backup.
Pick Your Covered Period
It appears that borrowers will be able to pick their own covered periods in which to measure spending to determine forgiveness. Presently, a borrower can choose either an 8-week period or a 24-week period. As proposed, borrowers will be able to pick any period between 8 weeks and 24 weeks.
This custom period will allow borrowers to cut off testing when loan proceeds, which were computed based on 10 weeks of payroll, run out instead of measuring spending long after the loan proceeds were consumed. By ending the covered period before 24 weeks, borrowers will be able to trim their workforce without having to confront the penalties for forgiveness reduction because of lower salaries or a reduction in employee hours. Borrowers must meet their February 15 FTE during the covered period that they select.
With so many changes to the forgiveness matrix, borrowers should not be submitting applications for forgiveness until they understand how the playing field has changed.
Webinar Coming Soon
We will be resuming our webinars on January 8, 2021 at 2:00 PM. In this next program, we will highlight the changes in the forgiveness process and the new opportunities for a limited universe of borrowers under the new round of PPP loans. Visit our PPP Resource Center for more information.
Best wishes for a merry Christmas and a happy and healthy New Year.
Scott Borsack is a partner with Szaferman Lakind and chair of the Business Department. To contact Scott please email him at firstname.lastname@example.org or call 609.275.0400.
Please note that the content of this blog is provided for information and education only. Nothing stated herein is intended to create an attorney client relationship or to constitute legal advice.