The Paycheck Protection Program (“PPP”), created as part of the Coronavirus Aid, Relief, and Economic Security (“CARES Act”), authorized loans to certain businesses affected by the COVID-19 pandemic. If businesses use their PPP loans to pay qualified business expenses, the entire loan may be forgiven. CARES Act Section 1106(i) excludes the forgiveness of PPP loans from gross income but did not address whether otherwise deductible expenses paid with proceeds of a forgiven PPP loan would be deductible. The IRS’s position has been that such a deduction is not allowed. See IRS Notice 2020-32 and Rul. Rule 2020-27. Although many, if not most, tax advisors disagreed with the IRS’s position, the issue presented a quandary for tax advisors.
Congress settled the issue in the Consolidated Appropriations Act, 2021 (“Act”), enacted on December 27, 2020. The Act provides for new stimulus payments and includes significant provisions relating to PPP loans. Among these provisions is Congress’ rejection of the IRS rulings. In addition, the IRS may not disallow certain tax attributes, including basis increase in a borrower’s assets. This provision applies to both existing and new PPP loans. The Act also expands the authorized payments with PPP loans. Such authorized payments include payroll, utilities, mortgage, rent and other operation expenditures, property damage costs and supplier costs.
On January 8, 2021, the Small Business Administration (“SBA”), in consultation with the Treasury Department, announced that PPP would re-open the week of January 11 for new borrowers and certain existing PPP borrowers, including eligibility for a “Second Draw PPP Loan,” and describes key PPP updates. For information on SBA assistance to small businesses, see sba.gov/ppp or treasury.gov/cares.