PPP Loans are Tax-Free and Forgiven Expenses are 100% Deductible (Tax Planning in the Next Ten Days is Crucial)
Tax planning in the next ten days will be crucial. The bill, the text of which was released Monday, would fund a new round of PPP loans and would alter 2020 taxable income for many businesses.
A new stimulus package (not yet law) may be passed soon and contains large tax changes that affect taxable income in 2020 for many businesses. Understanding these possible changes is crucial for your year-end tax planning. We’ve put together a summary of the main provisions in the bill – we encourage clients to contact us now to set up tax planning meetings in the coming days. The bill has not been passed into law yet, and the situation is still in flux – make sure to monitor email updates from Ryan & Wetmore.
How Likely is the New Bill to Pass?
Congress reached a preliminary deal on Sunday for a $900 billion stimulus package that could be passed in the coming days – perhaps even in the next few days. If any Senators raise objections to the bill, they could slow down its passage. However, the bill has bipartisan support and looks likely to pass – even if some members of Congress slow it down slightly. That said, here are the main provisions in the bill:
PPP: Loans are Tax-Free and Forgiven Expenses are Now Deductible
- The new bill clarifies that deductions are allowed for expenses covered by PPP loans that are or will be forgiven. This overrides the previous interpretation issued by the IRS and could significantly reduce your taxable income in 2020 if you have a PPP loan.
- It also specifies that PPP loans will not be included in taxable income.
- If you have a PPP loan that has been or may be forgiven, these changes affect your year-end tax planning – contact advisors, attorneys, and CPAs.
PPP: Another Round
- The bill contains $284 billion for another round of forgivable PPP loans.
- Small businesses (less than 300 employees) may be eligible for a second PPP loan if they can show a revenue reduction of at least 25% in any quarter of 2020 relative to the same quarter in 2019.
- More non-payroll expenses are eligible for forgiveness.
- The second round would allow borrowers who returned all or part of their PPP loan to reapply for the maximum applicable amount.
- Other nonprofits, including 501(c)(6) Organizations, may be eligible in the second round.
- The new PPP loans will be based on either 2.5 times average monthly payroll costs for either the trailing 12 months or 2019 payroll; restaurants and hotels (NAICS code 72) may be eligible for 3.5 times payroll.
- The bill calls for a simplified forgiveness request process for existing loans of $150,000 or less.
- S corporation and partnership owners should note that the new bill states that no basis increase will be denied because of the PPP loan exclusion from gross income.
- The new bill also provides more funding for the EIDL program.
- The bill clarifies that EIDL advances do not impact PPP forgiveness.
- If you have a PPP loan or may be eligible for a new one, make sure you’re subscribed to our newsletter to receive email updates from Ryan & Wetmore.
Tax Credits and Other Provisions
- The bill expands the Employee Retention Tax Credit (ERTC) by increasing to 70% the credit on up to $10,000 of wages per quarter and allows access to both ERTC and PPP for wages not covered by forgiven PPP proceeds.
- It also extends the Work Opportunity Tax Credit for five years and the tax credit reimbursement for paid sick and family leave due to the pandemic for three months.
- Certain deferred payroll taxes are extended.
- The bill contains $3 billion in additional grants for hospitals and healthcare providers to be reimbursed for healthcare-related expenses or revenue lost due to the pandemic.
- Other programs have been expanded, extended, or made permanent.
This stimulus bill contains $900 billion for direct stimulus payments, expanded unemployment, new PPP loans, and more, but it could also affect your taxes in important ways. Effective tax planning could save individuals and businesses large sums of money if this bill passes. Contact CPAs and tax planning experts as soon as possible to discuss how it could affect you.
Effective tax planning is more important now than ever. Click here to contact Ryan & Wetmore.
About Pete Ryan
Co-founder & Partner
Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries, including healthcare. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
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About Jack Ramsey
Jack Ramsey is a Finance Consultant at Ryan and Wetmore. He focuses on government contractor services as well as research and analysis of the economic, tax, and regulatory environment. Jack graduated from American University with a Bachelor of Science in Economics.