Congress Adds $310 Billion to Paycheck Protection Program; Businesses Get a Second Chance at Obtaining Loans

(Parker Tax Publishing April 24, 2020)

On April 23, the House of Representatives passed H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act. The legislation, which was passed by the Senate two days earlier and is expected to be signed into law shortly, adds $310 billion to the Paycheck Protection Program - nearly doubling the program's funding. Small businesses that were shut out of an earlier distribution of funds will get a second chance at obtaining one of the coveted loans. H.R. 266.

Practice Aid: For an UPDATED CLIENT LETTER on the Paycheck Protection Program CLICK HERE
In addition to explaining the details of the program, the letter informs clients that the program has received additional funding and is reopening for a limited time.

Background

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Included in the CARES Act was a special loan program aimed at keeping businesses afloat during the Coronavirus pandemic. That loan program, called the Paycheck Protection Program (PPP), authorized the Small Business Administration (SBA) to guarantee $349 billion in new loans to eligible businesses and nonprofits. Another program provided funding for economic injury disaster loans. If certain criteria are met, a business's PPP loan may qualify for tax-free loan forgiveness.

Businesses were eligible to start applying for the loans on April 3, 2020. Unfortunately, the loan program ran out of money in less than two weeks. As a result, more money was added to the PPP in the Paycheck Protection Program and Health Care Enhancement Act (the "Enhancement Act"). The Enhancement Act includes an additional funding in the amount of $310 billion for PPP.

For an in-depth report on the CARES Act, see the March 30, 2020 issue of Parker's Federal Tax Bulletin (PFTB 2020-03-30). For an in-depth report on the PPP, see the April 7, 2020 issue (PFTB 2020-04-07).

IRS and SBA Update Guidance Relating to PPP

Since the PPP was enacted, additional guidance from both the IRS and the SBA has been released. And, as is normal with laws pulled together in a short period of time, there are some unresolved questions.

Accounting for Employment Taxes When Calculating Payroll Costs. Among the additional guidance released by the SBA is a Q&A (SBA Paycheck Protection Program FAQ (2020-04-06)) on how a borrower should account for federal taxes when determining payroll costs for purposes of -

(1) calculating the maximum PPP loan amount;

(2) determining the allowable uses of a PPP loan; and

(3) calculating the amount of a loan that may be forgiven.

According to the SBA, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee's and employer's share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer's share of payroll tax.

Example: Employee A earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld. For purposes of a PPP loan, Employee A counts as $4,000 in payroll costs. Employee A would receive $3,500, and $500 would be paid to the federal government. However, the employer-side of federal payroll taxes imposed on the $4,000 in wages is excluded from payroll costs.

Deductibility of Expenses Related to Forgiven PPP Loans. With respect to unresolved issues, practitioners have been questioning whether payroll and other expenses paid with PPP funds from loans that are forgiven, are deductible on a business's tax returns. No definitive guidance has been issued and many practitioners are waiting on the IRS to issue an opinion on this topic.

Observation: It is doubtful that businesses will be able to deduct payroll and other costs paid by PPP loans where the loans are forgiven. Currently, no specific legislation allows such a deduction. Thus, Code Sec. 265, which denies a deduction for expenses relating to tax-exempt income, would most likely apply.

PPP and Deferral of Employment Tax Deposits. After PPP was enacted, the IRS updated its FAQ on deferral of employment tax deposits to provide some frequently asked questions (FAQs) and answers regarding the impact of receiving a PPP loan. One of the provisions in the CARES Act allows businesses to defer employment tax deposits and payments through December 31, 2020. Practitioners had inquired as to whether the receipt of a PPP loan affects the deferral of employment tax deposits under the CARES Act. According to IRS FAQ 4, employers that receive a PPP loan may not defer the deposit and payment of the employer's share of social security tax that is otherwise due after the employer receives a decision from a lender that the loan was forgiven. However, the amount of the deposit and payment of the employer's share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the "applicable dates." The applicable dates are December 31, 2021, for 50 percent of the deferred amount, and December 31, 2022, for the remaining amount.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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