Under the Coronavirus Response And Relief Supplemental Appropriations Act of 2021(the “Act”), passed last week by Congress and ultimately signed into law, PPP borrowers will now be able to deduct payroll and non-payroll expenses funded with their PPP loans, and will not have to include PPP loan forgiveness in income.
PPP Loan Deductibility
For the majority of existing PPP borrowers, the most significant change in the PPP rules confirms that, despite recent IRS rulings to the contrary, they will not lose the income tax deduction that was originally expected to be available for payroll and non-payroll expenses funded and paid from PPP loans, which expenses are normally tax deductible.
The CARES Act originally provided that the forgiveness of a PPP loan would not be included in income. Shortly thereafter, the IRS issued Revenue Notice 2020-32, which stated that expenses paid from a forgivable PPP loan would not be deductible. The Act now clearly indicates that expenses paid with a PPP loan will be deductible!
The vast majority of PPP borrowers used their loan money to pay wages, payroll tax expenses, utilities, rent, and interest, which are all normally tax deductible.
Shareholders of S corporations will receive another benefit. The Act also provides that any income tax basis increase that occurs as a result of receiving the PPP loan will not be lost upon forgiveness of that loan.
Deductibility for Independent Contractors, Sole Proprietors, and Farmers
The income tax deductibility of expenses paid with PPP loans likewise applies to independent contractors, sole proprietors, and farmers (Schedule C or Schedule F filers).
The PPP rules benefit such individuals as they are able to receive forgiveness of a PPP loan where the proceeds constituted owner replacement compensation amount, as well as wages paid to non-owner employees.
An independent contractor, sole proprietor, or farmer who received the PPP loan and spent it on personal expenses (from his or her owner replacement compensation), rather than non- owner payroll, however, will not be able to deduct those expenses, but they will not have to include the loan forgiveness amount in income.
EIDL Advance Non-Taxable and No Longer Reduces PPP Loan Forgiveness
The Act also replenishes the EIDL Advance Fund, which allows businesses suffering a substantial economic injury to apply for an advance that does not need to be repaid, in amounts up to $1,000 per employee, capped at $10,000 in total.
Prior law stated that any EIDL Advance received would reduce PPP Loan Forgiveness, essentially requiring the EIDL Advance to be repaid.
The Act repeals this provision so the receipt of an EIDL Advance will have no impact on PPP loan forgiveness and will not have to be repaid!
This is certainly better than a lump of coal in your stocking!!