New COVID Relief Legislation Provides Tax Benefit

Written by Jeffrey D. Davine

The new COVID relief bill extends (and modifies) certain provisions that were included in the CARES Act that was enacted in March.  This legislation, signed by the President on December 27, will provide $900 billion of additional financial assistance to individuals and businesses that have been affected by the pandemic.

Among the provisions contained in the new legislation is funding for additional forgivable Paycheck Protection Program (“PPP”) loans. In addition, it will allow businesses that are facing severe revenue reductions with the opportunity to apply for a second PPP loan.

Perhaps most importantly for businesses, the legislation ensures that PPP loan recipients can claim a deduction for the payroll costs and other qualifying expenses paid with forgiven PPP loan proceeds. This provision reverses a recent decision by the IRS that prohibited PPP loan recipients from claiming a deduction for these expenses.  According to lawmakers, this relief clarifies Congress’ intent when it created the PPP to ensure that business owners can avoid unexpected tax bills.

Normally, when a loan is forgiven the borrower is required to recognize income for tax purposes equal to the amount of the forgiveness. Forgiven PPP loans have been exempted from this rule. In addition, Congress has now confirmed that the qualifying business expenses paid with the forgiven PPP loan proceeds can be claimed as a deduction.  This is a double benefit.  First, the business that received funds from the government will not be required to pay income taxes on the proceeds. Second these nontaxable funds will generate a deduction that will offset other income of the business.

This means, for example, that a corporation that receives a $500,000 forgivable PPP loan will not only not be required to pay income taxes on the $500,000 (which, applying the current 21% federal income tax rate, will save it $105,000 in federal income taxes), it will also generate a deduction of $500,000 (which will save it an additional $105,000 in taxes).

At present, it is unclear which states may adopt the expanded deduction rules contained in the new legislation. As a result, it is possible that the computation of taxable income for state income tax purposes could be materially different depending upon the particular state.

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