Small business PPP loan 2.0 recipients may benefit from this key tax change

Stimulus deal includes extended PPP, funding for vaccine distribution: Rep. Dan Meuser

Rep. Dan Meuser. R-Penn., provides insight into what the stimulus deal will include and when it will most likely be voted on.

Congress passed a $900 billion round of coronavirus relief, which will allow eligible small business owners to apply for another loan through the popular Paycheck Protection Program, with some major differences.

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One key change loan recipients are likely to benefit from is that their loan dollars may be tax-deductible.

Lawmakers modified language to ensure that recipients who have their loans forgiven are able to claim tax breaks on deductible expenses – even if they were paid for using the government aid, marking an important about-face from the initial round.

It is expected more guidance could follow on the issue, including whether the tax breaks can also be claimed at the state level.

PPP BORROWERS STAND TO GAIN TAX DEDUCTIONS

Tax deductibility became a controversial topic after the IRS issued guidance in the spring preventing business owners who had their PPP loans forgiven from claiming tax breaks, since the loans themselves were tax-exempt. That guidance was based on existing law, which generally aims to prevent people from receiving a “double tax benefit.”

U.S. Treasury Secretary Steven Mnuchin  backed the IRS ruling, saying at the time it’s “basically tax 101.”

“The money coming in the PPP is not taxable,” Mnuchin told FOX Business in May. “So if the money that’s coming is not taxable, you can’t double-dip, you can’t say you’re going to get deductions for workers that you didn’t pay for.”

If the PPP grants were taxable, the deductions would be viable, Mnuchin added.

Others, however, said eliminating the ability of recipients to claim those deductions renders the loan less valuable to the recipient.

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In addition to the prospect of tax deductible expenses, here’s a look at some of the other terms expected to accompany the renewed round of PPP lending.

Loans can be distributed to a maximum amount of $2 million. In order to achieve forgiveness, at least 60% of the money must be put toward payroll expenses, while the rest can go toward rent, mortgage interest and utilities.

Eligible applicants must have fewer than 300 employees and must be able to show a 25% decline in revenues between the final quarter of last year and the same period in 2020.

Loans are expected to be available through the end of March.

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