It’s been about a year since the Paycheck Protection Program (PPP) was launched under the CARES Act. For contractors, as well as other business owners, the PPP has been a double-edged sword.
On the one hand, it’s provided much-needed financial relief during the COVID-19 pandemic. On the other, the complexities of applying for a loan and understanding the tax impact have been challenging.
With the passage of the Consolidated Appropriations Act (CAA) late last year, both edges of the sword got a little sharper. If the details of the CAA have faded a bit since the initial news, here’s a refresher.
As you may be aware, recipients of PPP loans may qualify for debt forgiveness if certain requirements are met and a timely application is submitted to lenders. The rules are complex. They include a stipulation that at least 60% of the borrowed funds must be used for payroll. Other expenses originally named eligible for forgiveness include rent, mortgage interest and utilities.
Under the CAA, four new expense categories now qualify:
1. Eligible operations expenditures. These include payments for software used for cloud computing, HR, payroll, sales/billing, and accounting for or tracking of supplies.
2. Eligible expenses for employee safety. These include some expenses incurred to buy personal protective equipment (PPE). Also applicable are expenses incurred to help the borrower comply with COVID-19 federal health and safety guidelines or equivalent state and local guidelines between January 1, 2020, and the end of the national COVID-19 emergency declaration.
3. Eligible expenses for property damage caused by civil unrest. These expenses cannot have been previously covered by insurance or other reimbursement. Construction companies that had job sites damaged during the past year may find this relevant.
4. Eligible supplier expenses. These include expenses paid for supplies that are essential to the entity for operations pursuant to a contract, order or purchase order.
The tax impact of PPP loans has been a matter of much confusion. Under the CAA, it’s been clarified that the IRS won’t deny any deduction or tax basis increase for expenses paid with proceeds from forgiven PPP loans. In other words, if your construction business takes out a PPP loan that’s forgiven, the forgiveness is a tax-free event for federal income tax purposes as the forgiveness income is not taxable.
Furthermore, the CAA states that you can deduct expenses that were paid for with proceeds from forgiven PPP loans and you can obtain tax basis in assets that were paid for with proceeds from forgiven PPP loans. Generally, when the federal government allows tax-free treatment for a forgiven loan, you must reduce so-called tax attributes (net operating loss carryovers, capital loss carryovers and so forth). But under the CAA, no such reduction is required when PPP loans are forgiven. These favorable changes are retroactively effective to the first day of the PPP’s launch.
Getting another loan
Are you interested in taking out another PPP loan for your construction company? If so, the CAA does allow eligible businesses to take out so-called “second-draw” PPP loans.
These loans are primarily intended for smaller and harder-hit businesses with 300 or fewer employees that have used up, or will soon use up, the full amount of their initial PPP loans. The maximum second-draw loan amount is $2 million, and only one such loan can be taken out.
In order to qualify for a second-draw loan, a company must demonstrate at least a 25% decline in gross receipts in any quarter of 2020 as compared to the corresponding quarter in 2019. Qualifying businesses can generally borrow up to 2.5 times their average monthly payroll costs for either the one-year period before the date on which the loan is made or calendar year 2019. The application deadline is March 31, 2021.
The PPP has generally been helpful to construction businesses. If you’re participating in any fashion this year, work closely with your CPA to manage the finer points.
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