How Income Tax Planning Software Can Help Businesses Seeking Their Second Round of PPP Loans

10 minute read

A second round of stimulus is on its way to American businesses and individuals. On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 into law which included – among other things – additional funding for the Paycheck Protection Loan Program. This $900 billion stimulus package pales in comparison to the $2.2 trillion package provided in March, but there may be opportunities for you to snag additional financial assistance if it's needed. We’ll also take a look in this blog at income tax planning software.

Overview of the Consolidated Appropriations Act, 2021

The Consolidated Appropriations Act merged many smaller bills into one $900 billion omnibus bill. In addition to the measure that establishes another round of stimulus checks (this time for $600) to be delivered to individuals in early 2021, the following pieces of legislation are ones your clients will likely find compelling:

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

This Act allows eligible businesses to seek second rounds of PPP loans and makes it easier to qualify for forgiveness on prior PPP loans. More on this later.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020

This Act extends certain alternative energy tax credits that were set to expire, namely for solar and wind energy.

The No Surprises Act 

This Act helps alleviate the cost of out-of-network medical care by establishing that pricing disputes between insurers and providers must go through an arbitration process.

The COVID-Related Tax Relief Act of 2020

This Act extends many of the benefits provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act (FFCRA) that were set to expire. Some of these extensions were:

  • The $600 weekly boost to unemployment benefits expired on December 26, 2020. The Tax Relief Act calls for a $300 weekly boost to unemployment benefits for an additional 11 weeks.
  • The $300 above-the-line charitable contribution deduction available to individual taxpayers is extended through 2021.
  • Individuals who elected to defer the employee portion of payroll taxes were awarded an extended repayment period. Repayment is now due on December 31, 2021 rather than April 30, 2021.
  • Prior law excluded from gross income up to $1 million of discharge of indebtedness from principal residences occurring prior to January 1, 2021. The Tax Relief Act allows for a similar exclusion for discharges occurring prior to January 1, 2026, but the exclusion is limited to $750,000. If you have a good income tax planning software at your disposal, exclusions like this will automatically populate in your tax projections.
  • The maximum Employee Retention Tax Credit is increased from 50% to 70% of qualified wages, raising the maximum credit to $14,000 per employee for the first two quarters of 2021.
  • Refundable payroll tax credits for paid leave are extended through March 31, 2021.

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How the Omnibus Bill Changes PPP Loans

The Consolidated Appropriations Act reinstated the Paycheck Protection Program (PPP) that expired on August 8, 2020. The goal for the program remains unchanged: to help businesses keep their workforce employed during the coronavirus crisis. Business owners can apply for government-subsidized loans, and if they use those funds in a qualified manner, their loans will be forgiven. However, the Consolidated Appropriations Act did make a few changes to the program.

Program Eligibility

Businesses who took out a first-round PPP loan may request a second loan, but the eligibility requirements have changed.

  • A business cannot have more than 300 employees compared to 500 employees under prior PPP regulations.
  • Companies that receive the employee retention payroll tax credit are now able to request a PPP loan. They must simply prove that the wages they use to claim the credit were not paid for with PPP loan proceeds.[KM6]501(c)(6) nonprofits are now eligible, while firms that focus on political lobbying and firms with strong ties to China are not.

Maximum Loan Amounts

Businesses are eligible for loans at 2.5 times the average monthly payroll costs, up to $2 million. Prior maximums were 2.5 times payroll costs up to $10 million. Additionally, aggregate borrowing from both rounds of PPP loans cannot exceed $10 million.

Eligible Expenses

To qualify for PPP loan forgiveness, businesses must spend at least 60% of that money on payroll. Old and new guidelines agree that the remainder can be spent on rent, mortgage interest, and utilities, but new guidelines also add the following expense categories:

  • Operations costs like cloud computing and software
  • Property damage costs
  • Supplier costs
  • Worker protection expenditures like sneeze guards and hand sanitizer

Tax Consequences

PPP program recipients have two main tax concerns: if their PPP loans are forgiven, (1) must they include the loan proceeds in gross income? and (2) are the expenses that were paid with loan proceeds deductible?

The new legislation affirms prior guidance that loan proceeds can be excluded from gross income, even if the loan is ultimately forgiven. But the new legislation overturns prior guidance concerning the deductibility of eligible program expenses. When businesses use loan proceeds to pay for otherwise deductible business expenses, they can continue to deduct those expenses whether their loan is forgiven or needs to be repaid. This directly contradicts two releases posted by the IRS in November 2020. Both Revenue Procedure 2020-51 and Revenue Ruling 2020-27 stated that such expenses were nondeductible if the business could reasonably expect that their loan would be forgiven. Overturning these IRS releases is a major win for small businesses; not only can they exclude their loan proceeds from gross income, but they can also continue to deduct business expenses that were paid for with those loan proceeds.

EIDL Recipients

Businesses that received both PPP loans and Economic Injury Disaster Loans (EIDLs) are also in luck: under prior guidance, EIDL advances reduced a borrower’s forgiveness amount. Thanks to provisions in the Consolidated Appropriations Act, EIDL advances do not affect PPP loan forgiveness. Businesses whose forgiveness was already reduced for EIDL advances will be made whole.

Loan Forgiveness

Businesses that received $150,000 or less of PPP loan proceeds can apply for forgiveness using a simplified, one-page document. They will be required to include basic information about their loan, including how they used the proceeds and what their payroll costs were. These businesses will also be relieved of the requirement to retain supporting loan documentation for six years. Now, these borrowers can discard employment documentation after only four and all other records after three.

If your business has fewer than 10 employees, you have a better chance of obtaining funding this go-round. The Consolidated Appropriations Act set aside $25 billion for companies with fewer than 10 employees and provided $10 billion to community financial institutions and small credit unions that are most likely to support very small businesses.

Income Tax Planning Software to the Rescue

The application process for PPP loans is quite simple, but it can be overwhelming to small business owners who don’t fully understand the loan eligibility requirements. You can prepare the application by working with your bank and payroll provider, collecting the appropriate documentation, and calculating the funding you can expect to receive.

Once you submits your application, you can make a plan for that money. By dedicating PPP funds to cover payroll and other eligible expenses, you may be freed up to spend money in other areas. With help from an income tax planning software like the one we created at Corvee, you can forecast how your purchasing decisions will affect your tax position for the current and future tax years.

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