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Tuesday, December 22, 2020

CARES ACT COVID MODIFICATIONS WILL ALLOW DEDUCTIONS

 H.R. 133 was recently passed by Congress. Under the CARES Act, many businesses were able to receive Paycheck Protection Program loans. If the proceeds were used to pay employee compensation and otherwise meet requirements, the debt is forgiven and need not be repaid.

Until now, it was understood that such loan forgiveness would not give rise to gross income for the affected businesses. However, the government was taking the position that if the funds were spent on deductible expenses such as pay for its workers, the business could not deduct the expenditure.

If the new law is not vetoed by President Trump, Section 276 provides that business expenditures will be deductible by the business. This is good news for such businesses and adds to the relief being provided for COVID 19 losses.

Here is a summary of the new provision from a House publication:

Sec. 276. Clarification of tax treatment of Paycheck Protection Program loans. The provision clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

Section 278 of the Act provides similar language for other loans, emergency EIDL grants, and other loan repayment assistant provided by the CARES Act.

[see later posted update to this posting]

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