The Paycheck Protection Program (PPP) was designed to provide a direct incentive, in the form of a forgivable loan, for businesses to keep their employees on payroll. For the loan to be forgiven, PPP loan recipients must meet certain criteria, including spending at least 60% of the loan on payroll expenses. The program was enacted as part of the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) in March 2020, and expanded by the Paycheck Protection Program Flexibility Act” in June 2020.
In our last update, we mentioned that PPP loan recipients should be aware that PPP loan forgiveness may cause otherwise Qualified Research Expenses (“QREs”) to become ineligible for the R&D Tax Credit for Tax Year 2020. With an expert understanding of these and other tax provisions, taxpayers can plan to mitigate the effects of PPP loan forgiveness and the R&D Tax Credit by applying PPP funding to expenses other than Qualified Research Expenses. We also anticipated that Congress would pass legislation expressly making the PPP spend deductible.
Legislative Update – The Consolidated Appropriations Act, 2021
Most recently, Congress has expanded the Paycheck Protection Program again to ensure PPP recipients can deduct payroll costs and other expenses covered by forgiven loans, reversing the Treasury Department ruling that originally denied the deductions.
This provision clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan, and that deductions are also allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven. Still there are nuances, exceptions and factual circumstances that can affect the deductibility (and eligibility to include in the research credit) of expenses paid for with PPP funds. Therefore, taxpayers should speak with their tax planner about what is best for their company’s circumstances.
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