By Kate Roth and Ferdinand Ruplin
Shortly before the end of the bizarre and painful 2020 calendar year, the Consolidated Appropriations Act for 2021 (the Act) was signed into law, providing an additional $284 billion appropriation for the Paycheck Protection Program (PPP).
The American Rescue Plan Act (ARPA), signed into law by President Biden on March 11, 2021, appropriated an additional $7.25 billion to the PPP. The new rounds of PPP funding are available for both new and some repeat borrowers that meet specified criteria.
This article aims to help nonprofits understand (i) whether they are eligible for the new round of PPP funding, (ii) the new and expanded list of expenses that can be paid with PPP funds, and (iii) the tax implications for PPP loans at the federal and state levels.
New Eligible Borrowers
The Act and the ARPA expanded the eligibility criteria to allow certain nonprofits that were previously ineligible to participate in the PPP. The following types of nonprofits are now eligible to apply for and receive a PPP loan:
- 501(a) tax-exempt “destination marketing organizations” engaged in marketing and promoting communities and facilities that promote travel and leisure.
- 501(c)(6) organizations that (a) do not receive more than 15% of receipts from lobbying activities, (b) have less than 15% of their total activities as lobbying activities, (c) did not exceed $1 million in lobbying activities during the most recent tax year, and (d) do not employ more than 300 employees.
- An “additional covered nonprofit entity” listed in 501(c) other than those listed in (c)(3), (c)(4), (c)(6), or (c)(19) if the organization meets the same qualifications stated above.
- 501(c)(3) nonprofits and veterans’ organizations with up to 500 employees.
Expanded List of “Covered Expenses”
In addition to payroll, rent, mortgage interest, and utility expenses, borrowers may now use PPP funds for certain other expenses, provided that at least 60% of loan proceeds are used for payroll expenses. The new list of forgivable costs and expenses includes business software, cloud computing, human resources and accounting needs, and costs related to property damage from civil disturbances in 2020 not otherwise covered by insurance.
The deadline to apply for a first or second PPP loan is fast approaching. A business must submit its application by March 31. The PPP Extension Act of 2021, which has cleared the House and awaits a vote in the Senate, would extend the application deadline to June 1.
Tax Impacts of PPP Loan Forgiveness
In certain instances, loan forgiveness may give rise to cancellation of debt income (CODI) includible in a borrower’s gross income. Fortunately, for PPP borrowers, the Act explicitly excludes PPP loan forgiveness from CODI.
Under the Act, both first and second round PPP borrowers who receive loan forgiveness (i) may claim deductions for covered expenses funded by PPP loan proceeds and (ii) do not have to reduce tax attributes.
Although certain states have yet to pass legislation addressing the state-level tax treatment of PPP loan forgiveness, pending legislation among states in the Northwest illustrates the different approaches that states are taking:
- Idaho legislation would exempt PPP loan forgiveness from income.
- Oregon’s most recent legislation would not exempt PPP loan forgiveness from income.
- Washington Department of Revenue issued guidance directing businesses not to report PPP loan proceeds in gross receipts for purposes of the B&O tax.
Contact one of Tonkon Torp’s experienced business attorneys for help navigating the complexities of your PPP loan.
This client alert is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact any of the attorneys in our Nonprofit Practice Group, or the attorney with whom you normally consult.