The SBA and Treasury Department have issued voluminous guidance concerning implementation of the Paycheck Protection Program (PPP), but Congress has not changed the PPP since the CARES Act established the program. In recent weeks, several bills have been introduced in the House and the Senate that address aspects of the PPP and the SBA and Treasury’s published guidance. We usually refrain from commenting on bills before they become law. However, many businesses are nearing the end of their PPP coverage periods, and the bills may affect their decisions. Below, we will summarize the proposed legislation in three areas that have been controversial as borrowers have progressed through the PPP.
The CARES Act established an eight-week period during which borrowers must spend PPP funds on eligible expenses to qualify for loan forgiveness. On May 28, the House passed a bill that would triple the eight-week coverage period to 24 weeks. A similar Senate bill would increase the coverage period to 16 weeks. While the differences between the House and Senate proposals will have to be reconciled, it seems likely the coverage period will be extended beyond eight weeks. That extension should benefit businesses whose operations have been curtailed and whose compensation costs haven’t been sufficient to qualify for full PPP loan forgiveness.
Use of PPP Funds
Though the provision was not included in the CARES Act, the SBA and Treasury ruled that no more than 25% of a business’s expenditures qualifying for forgiveness could be for non-payroll costs (e.g., rent, mortgage interest and utilities). The same bill that passed the House last week includes a provision that would allow a borrower to spend up to 40% of forgivable funds on non-payroll costs. More importantly, the House bill requires a borrower to spend at least 60% of its PPP funds on payroll costs to qualify for forgiveness at all. With the extended coverage period, most businesses won’t find that threshold difficult, but borrowers should be aware of it in case it jeopardizes their eligibility for any forgiveness.
Tax Deductibility of Expenditures
The CARES Act provides that forgiven PPP loans are not taxable income to borrowers. Because the loan forgiveness is not taxable, the IRS ruled that it would not allow borrowers to deduct expenses paid for with forgiven loans. Several senators and representatives declared that the IRS’s ruling is contrary to the intent of the CARES Act. Identical bills in the Senate Finance Committee and House Ways and Means Committee would explicitly allow deductions for expenses paid for with PPP funds.
As previously indicated, the three areas we discussed are particularly pertinent to business owners as they approach the end of their PPP coverage periods. Once the bills are enacted into law, several other provisions will warrant analysis as well, so keep a look out for further articles from us concerning the upcoming legislation. We are here to walk you through each update of the PPP. Please contact a Hantzmon Wiebel team member if you have any questions.
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.