CARES Act

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The new financial relief law enacted late last year–the Consolidated Appropriations Act–explained that costs paid by business factors concerning loans made through the PPP are in fact tax-deductible. In doing so, the law rendered previous IRS guidance in the form of Notice 2020-32 and Revenue Ruling 2020-27 obsolete.

Background: Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent alterations, PPP loans might be forgiven if proceeds are used over a 24-week interval to cover payroll costs or other qualified costs like employee benefits, mortgage interest and rent, and utilities. To qualify for citizenship, at least 60 percent of these proceeds have to go to payroll expenses.

Normally, forgiveness or cancellation of a debt leads to taxable income to the debtor. On the other hand, the CARES Act created a special tax exception for loans in which a company files for tax forgiveness. This was clearly one of the cornerstones of the economic recovery plan for companies.

Since there’s no taxation on a forgiven PPP loan, the IRS initially established that expenses regarding the usage of PPP loan costs aren’t deductible in Notice 2020-32. In essence, the IRS treated the situation for a tax wash. 2020-27 stating that expenses relating to PPP loans are not deductible if a company reasonably believes that the loan will be forgiven in the future, irrespective of whether the company has filed for forgiveness.

This judgment created a safe-harbor rule. When a PPP loan has been expected to be forgiven, but wasn’t, the company would have the ability to subtract the costs.

New law affects : The new law strengthens the PPP and provides specific new aspects. Also, for the first time, businesses that previously received a PPP loan might apply for another loan up to $2 million if the following conditions are met:

The company has 300 or fewer workers

The company has used or may use Whole amount of their initial PPP loan

The business can reveal a 25 percent gross decline in revenue in any 2020 quarter as compared with the same quarter in 2019

Significantly, the new law also determines that companies may deduct expenses paid with forgiven PPP loan profits. This provision supersedes the prior guidance issued by the IRS and reflects that the initial intent of Congress, according to the opinions of numerous commentators from the tax community. The American Institute of CPAs (AICPA) has been especially outspoken in its criticism of the IRS rulings.

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