PPP loan borrowers receive freebies from Congress
Companies and organizations that obtained PPP loans earlier this year received a generous donation just before the end of the year. On December 21, 2020, Congress passed legislation, the Consolidated Appropriations Act, 2021, offering two important victories for businesses.
First, the legislation asserts that all Paycheck Protection Program (P3) loans that are canceled will not be taxable for the businesses and organizations that obtained the loans. Normally, the debt forgiveness is taxable for the debtor. Congress clarified that this will not be the case for canceled PPP loans.
Second, and more importantly, Congress confirmed that expenses paid from PPP loan funds can be fully deducted by the business or organization. Until this legislation was passed, companies had been advised that they would not be able to deduct allowances, rent and other eligible expenses paid from PPP loan funds. The IRS has always interpreted these deductions based on traditional tax principles. The Service considered loan cancellation, coupled with expense deductibility, a significant double dip for businesses. The IRS even released Tax Ruling 2020-27 and Tax Procedure 2020-51 providing advice to businesses who wouldn’t know if their loans were canceled until next year. Now that Congress has spoken, these IRS rules have been rendered moot.
The new legislation also provides for new PPP financing, Sec. 501 (c) (6) non-profit organizations qualifying for loans for the first time, and offers businesses facing severe reductions in income the opportunity to apply for a second loan.