Congress Finally Did It! PPP Loans Now Fully Non-Taxable - By Kelly J. Bullis
Updated: Feb 13
In past articles, including one just a few weeks ago, I’ve been trying to cover the PPP loan forgiveness issue.
In a quick recap, IRS has been in a nasty mood in 2020, over-ruling the original intent of Congress that the forgiven PPP Loan funds were to be received as TAX FREE funds to help small businesses keep their employees working. Congress’s plan was that it was better that the employers kept their employees receiving paychecks until the economy could open back up again, rather than having to lay off their employees and then the Federal Government would have to pay unemployment compensation to those now laid off employees.
IRS came up with an obscure Code Section 265(a)(1) sec 1.265-1 to make expenses paid for with “tax free funds” to become non-deductible. In essence making the forgiven PPP Loan funds taxable. What a slap in the face the IRS was doing to so many businesses just barely hanging on. The employers would have been better off to NOT take the PPP loan, just lay off all their employees and let the employees collect unemployment directly. Then, when they rehired their employees, they wouldn’t be owing any BIG tax to the IRS for doing so!
Well, since last June, Congress has been promising to fix this “misunderstanding” with the IRS. Senator McConnel was ready to pass a bill back in June, but Speaker Nancy Pelosi held it up until after the November elections. She even said on CNN that she had done so deliberately to prevent Trump from getting any credit for more stimulus help. So now, here we are at the very end of 2020, and Congress finally passed the bill with instructions to the IRS that their intent was for the forgiven PPP loan to truly be non-taxable. The exact wording in this new bill is, “No deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1) of the CARES Act.” So, there you have it, better late than never. At the last minute, this bill was almost vetoed by President Trump, but he signed it into law on Sunday evening. What a relief!
Now in this latest bill, there is a “round 2” PPP loan provision. It will be open to those who received PPP loan money in the first round, if they can demonstrate a 25% reduction in sales in any quarter of 2020 compared to the same quarter of 2019. (It will be open to first time borrowers as well.) The loan will be equal to 2.5x monthly payroll expenses. If you are a restaurant or hotel, it jumps up to 3.5x monthly payroll expenses. Funds can be spent over a 6 month period and the new PPP funds will be fully non-taxable when forgiven.
So, there is finally some good news. There were a LOT of small business owners across America who were breathing a huge sigh of relief as we ended 2020! Welcome to 2021. Hopefully it will be a better year!
Did you hear? Prov 25:25 says, “As cold water to a weary soul, so is good news from a far country.”