Tax Advisor

As we ended 2020, the 2021 Consolidated Appropriations Act (CAA) was just signed into law, which provided a good start to 2021. With its passage, it brought second draw Paycheck Protection Program (PPP) loans (PPP2 loans), settled the open question on the deductibility of expenses paid with PPP and PPP2 loan proceeds, brought a number of other borrower-friendly changes to the forgiveness process, and allowed employers to claim the Employee Retention Credit (ERC) even if the employer received a PPP loan. March brought the American Rescue Plan Act of 2021 that increased funding for PPP loans, expanded the types of organizations eligible to apply for PPP loans, and eliminated the barrier that prevented organizations from being eligible for a shuttered venue operators grant (SVOG) if they had previously received a PPP loan. Throw into the mix program guidance from the U.S. Small Business Administration—perhaps most notable was its decision to discontinue the Loan Necessity Questionnaire requirement for PPP loans greater than $2 million—and it has been a pretty positive year for PPP borrowers. As we close out 2021 and start planning for compliance season, let’s take a look at a few of the above items and the potential effects on your filings for 2021 and, in some cases, potential amended filings for 2020.

The provision in the CAA that allowed for the deductibility of expenses paid with PPP funds contained another provision that allowed partners in partnerships and shareholders of Subchapter S corporations to increase the basis of their respective investment by their allocable share of the expenses giving rise to the PPP loan forgiveness. This basis increase would allow those partners and shareholders who may have been limited by the Section 465 at-risk rules to deduct pass-through losses that, without this provision, would be carried forward to future years.

Prior to the CAA, the IRS issued guidance stating that if there was a “reasonable expectation” the PPP loan would be forgiven, then the expenses would not be deductible in 2020 even if the PPP loan had not been forgiven by December 31, 2020. While the IRS has not released guidance on the timing of basis increase for PPP loan forgiveness, there appears to be a position to apply the basis increase in 2020 if there was a reasonable expectation the PPP loan would be forgiven. Partners or shareholders with a loss limitation in 2020 due to the at-risk rules should evaluate whether there was a reasonable expectation of forgiveness of the PPP loan at December 31, 2020, and if so, consider whether to take this position in order to obtain the basis increase and free up the disallowed losses on their 2020 returns.

The ERC was first introduced under the Coronavirus Aid, Relief, and Economic Security Act in March 2020. Most employers were largely unaware of the ERC because businesses that obtained PPP loans were not eligible. This all changed with the CAA, and the magnitude of the ERC benefit began to be known. The CAA made eligibility for the credit retroactive to 2020. One of the provisions of the ERC and new PPP rules was the prohibition on using the same payroll costs for both the ERC and the PPP forgiveness. This presented a potential problem for employers that qualified for the ERC for 2020 but already submitted their PPP forgiveness application.

In many cases, because of the simplicity of documentation, borrowers reported significantly more payroll than needed to obtain full forgiveness of their PPP loan. This led to a question as to the availability of the excess payroll reported on their PPP forgiveness application for use in calculating their ERC. In Notice 2021-20, the IRS provided guidance and several examples for these situations that generally allowed an employer to treat the excess payroll as eligible to the extent the excess payroll represented qualifying wages for the ERC.

The interaction of the ERC and PPP loans, especially PPP2 loans, became more critical during 2021 due to the easing of the ERC qualification requirements and increase in the maximum credit per employee. Employers were concerned with taking full advantage of the ERC while still obtaining full forgiveness of their PPP loan. Key strategies to achieve this result include:

  • Use the full 24-week covered period for your PPP loan
  • Consider amending the 2021 first- and second-quarter Forms 941 to claim the credit once the PPP loan covered period has expired and you can run projections with actual payroll numbers
  • Use of qualifying nonpayroll costs (up to the 40 percent total costs limit) in preparing your PPP loan forgiveness application; don’t forget about the expanded definition of nonpayroll costs for purposes of the loan forgiveness
  • Payroll costs for an individual employee in excess of the $10,000 per-quarter ERC limitation are eligible for PPP payroll costs
  • Employer-provided medical benefits are eligible payroll costs for both ERC and PPP purposes

Similar to the ERC-PPP interaction above, the SVOG rules have prohibitions against double-dipping on costs with the PPP loan costs. The SVOG can be used for expenditures incurred over a much longer time period than the PPP loan (through December 31, 2021, or June 30, 2022, depending on if a supplemental grant was obtained). This extended time period will generally provide for adequate payroll for both the SVOG and PPP loan forgiveness. 

The clarity provided during 2021 was a welcome relief to borrowers, employers, and grant recipients as they worked to bring their businesses out of the pandemic lockdowns. While generally business friendly, the guidance is complex and administratively cumbersome. As these programs wind down in 2021, the pace of change and new guidance will likely be reduced as well. We will continue to monitor and issue BKD Thoughtware® as new guidance is issued on these programs.

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

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