PPP Expense Deductibility and Second Draw Options for Eligible Entities

The Consolidated Appropriations Act, 2021 (the “Act”) was passed by Congress on December 21, 2020 and awaits the President’s signature. The Act includes changes to the original Paycheck Protection Program (“PPP”) as well as a second draw for small business that experienced a 25% or greater decline in gross receipts. The applicable highlights are discussed herein.

Sec. 276 – Original Paycheck Protection Program

• Tax Deductibility of PPP Expenses
The Act establishes that no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of PPP loan AND 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, thus superseding recently issued Revenue Ruling 2020-27 related to the deductibility of expenses associated with loan forgiveness. This treatment applies to the original PPP loan, second or subsequent PPP loan, and EIDL Advances
• New PPP Eligible Expenses
The Act provided for additional expenses that can be treated as eligible expenses to qualify for loan forgiveness. These expenses do not apply to loans for which the borrower has already received forgiveness as of December 21, 2020. However, the 60% payroll threshold has not been adjusted so these additional costs would be included with other non-payroll costs up to 40% of the loan amount.
o Covered Operations Expenditure
-software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.
o Covered Property Damage Cost
-property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
o Covered Supplier Cost
-expenditure made by an entity to a supplier of goods for the supply of goods that
• are essential to the operations of the entity at the time at which the expenditure is made;
• is made pursuant to a contract, order, or purchase order—
i. in effect at any time before the covered period with respect to the applicable covered loan; OR
ii. with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan;
o Covered Worker Protection
-purchase, maintenance, or renovation of assets that create or expand protection (e.g. drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an expansion of additional indoor, outdoor, or combined business space, an onsite or offsite health screening capability)
-particulate filtering face piece respirators

Sec. 307 – Simplified Forgiveness Application

Loans up to $150,000 may use a simplified forgiveness application likely following the existing process with Form 3508EZ

Sec. 311 – Paycheck Protection Program Second Draw Loans

The Act provided an additional draw for an ‘eligible entity’ which generally includes any business concern, nonprofit organization, housing cooperative, veteran’s organization, Tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative that—

• employs not more than 300 employees; and
• had a 25% of greater decrease in gross receipts during the first, second, third, or fourth quarter compared to the same quarter in 2019.

The loan amount is determined based on the average monthly payroll costs from 2019 or 2020 multiplied by 2.5, subject to a $2 million cap. The covered period is defined as 8 or 24 weeks beginning on the date of loan origination.

The most universal impact of the bill on PPP is the deductibility of the expenses associated with loan forgiveness and should be considered when estimating 2020 tax liabilities. The Act expanded covered expenses to include operations expenses, unreimbursed property damage costs, certain supplier costs, and expenses to expand worker safety protections. The Act also simplified the loan forgiveness process for taxpayers who received a PPP loan of $150,000 or less. Lastly, Congress provided eligible small taxpayers an opportunity to receive a second PPP loan provided they experienced a year-over-year decrease in gross receipts of 25% or more.

For additional assistance or if you have questions contact:

Matt Neuenswander, Tax Manager, Tanner LLC
801-924-5120 | mailto:mneuenswander@tannerco.com