Many of you out there may not have been aware of the true huge benefit given to businesses by the Consolidated Appropriations Act, 2021 (CAA 2021) signed into law on December 27, 2020. It did a lot of things to further assist individuals and businesses suffering under the onslaught of the COVID-19 pandemic that has gripped the nation since early 2020. It corrected what was probably the biggest error in the original CARES Act enacted on March 27, 2020. That act provided for Economic Injury Disaster Loans (EIDL Loans) and Paycheck Protection Program Loans (PPP), which were available to affected businesses. In the case of the PPP program, the funds received would be eligible to be forgiven if loan proceeds were used to pay certain costs and the companies met employee retention criteria. Pretty sweet deal, right?
Unfortunately, nobody brought the IRS on board with the program. Typically, when debts are forgiven, the loan proceeds are considered income under cancellation of debt rules. If you get money, and don’t have to pay it back, it’s income. Congress and Treasury did an OK job of eventually making clear that they never intended for the forgiven funds to be treated as income. That would greatly diminish the benefit received under the programs. However, there is a tax principle that if you use tax exempt funds to pay for expenses, you don’t have to pick up income based upon the tax-exempt funds, but you can’t deduct anything you spent the money on either!
So, after Treasury cleared up the not-taxing-the-forgiven-debt issue, the IRS announced it would not allow you to deduct what you spent the money on. In essence, completely undermining the intent of Congress. Think about it. If you can’t deduct what you spend the money on, isn’t that the same as picking up the forgiveness as income and then being able to deduct the expenses? You don’t have to be a CPA to figure that out. The problem was that Treasury could not clear up that issue merely by issuing an opinion.
Thankfully, the CAA 2021 corrected that huge issue at the amen hour. Sort of like the Christmas gift that comes a day or two after December 25. It clarified that companies would be allowed to deduct the expenses paid by program loans and funds which were forgiven. I can’t emphasize enough how huge this is to many small businesses. If you got a $200,000 PPP loan that was forgiven, and spent it on qualified expenses, you would be able to deduct the $200,000 and not have to pick up the forgiveness of debt as income. Assuming a 40 percent tax rate for combined taxes (Federal and State), that is a savings of $80,000, which would otherwise have been due on April 15, 2021.
There are many other provisions of the CAA 2021 that are also helpful, including additional PPP money, and there are provisions which may affect your handling of EIDL and PPP proceeds and other provisions of the law. Also as noted, Congress has a sneaky way of passing law changes at the drop of a hat, so please do your research or contact your tax advisor to get information relevant to your circumstance.