PPP loan forgiveness and taxes: Part 2

Earlier, Eileen Sherr, CPA, CGMA, MT, a director of the AICPA’s Tax Policy & Advocacy team, discussed prospects for reversing by legislation the IRS’s position regarding deductibility of business expenses paid with loan proceeds from the Paycheck Protection Program (PPP) that are ultimately forgiven. Now, that legislation has been enacted, by the Consolidated Appropriations Act, 2021 (CAA), P.L. 116-260. Sherr returns to outline that and other changes. Plus, we look ahead to possible developments during 2021 in tax legislation and pandemic relief.

What you’ll learn from this episode:

• What the CAA resolved regarding deductibility of business expenses paid by loan proceeds from the PPP, along with other AICPA advocacy priorities — and what remains unresolved.
• Possible emphases for tax legislation going forward from the Biden administration and the new Congress.
• Ongoing pandemic-related tax relief measures and advocacy at the federal and state levels.

Play the episode below or read the edited transcript:

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.

To comment on this podcast episode or to suggest an idea for another episode, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.

AICPA coronavirus, CAA, and 2020 tax-year filing resources

• Accounting firms can prepare and process applications for the PPP on the CPA Business Funding Portal, created by the AICPA, CPA.com, and fintech partner Biz2Credit.
• AICPA experts discuss the latest on the PPP and other small business aid programs during a biweekly virtual town hall. The webcasts, which provide CPE credit, are free to AICPA members. Go to the AICPA Town Hall Series webpage for more information and to register.
• Summary of Year-End Coronavirus Relief Act (CAA), developed by the AICPA Tax Practice and Ethics section (free to AICPA members)
• Annual Tax Compliance Kit, which includes engagement letters, organizers, checklists, and practice guides (free to AICPA members)
• AICPA PPP State Tax Treatment Chart provides guidance issued by the states on PPP forgiveness taxability and deductibility of expenses (free to AICPA members)
• AICPA Recommendations for Administrative and Filing and Payment Relief for State and Local Taxes during the Coronavirus Pandemic, including on guidance on conformity to federal on PPP tax issues
• 2020 Tax Policy & Advocacy Comment Letters, including expense deductibility for PPP loan recipients
• Coronavirus (COVID-19) Tax Policy & Advocacy Resources page (advocacy-focused news, blog posts, webinars, and podcast episodes)

Transcript:

Hello, and welcome to the JofA podcast. Today, we’re following up with Eileen Sherr, a director of Tax Policy and Advocacy for the AICPA, from our conversation posted in early December about then-proposed changes in the tax treatment of loan proceeds from the Paycheck Protection Program, or PPP. Those proposals have now become law, and Eileen will detail that development and related issues. We’ll also look ahead to prospective tax issues in the Biden administration and new Congress and continuing pandemic-related provisions for federal and state taxes.

Paul Bonner: Thank you, Eileen, for joining us to update the things that we’ve been discussing. The last time we spoke was in late November, and a lot has happened since then, hasn’t it? We have had some very big changes in the items that we talked about then. What is one of the biggest ones?

Eileen Sherr: The Consolidated Appropriations Act of 2021 was enacted on Dec. 27 of 2020.

And it included one of the big issues that we’ve been following, the PPP deductibility. And it provided clarification, as the AICPA had requested. The Consolidated Appropriations Act clarifies that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied by reason of the exclusion from gross income provided by the PPP. It applies to loans under both the original PPP program and subsequent PPP loans, under the second draw, the new enhancements that they included in this act.

We are pleased that the deductibility is there. And then IRS came out right away, two days into the year, on Jan. 6, and basically withdrew their prior ruling and notice and said they are going to follow what the law is now. And it will allow deductions for payments of eligible expenses when such payments would result, or be expected to result, in forgiveness of a covered loan under the Paycheck Protection Program. They are now allowing deductibility, as well as the forgiveness not being taxable.

Bonner: I’m sure that’s a big relief to many taxpayers who were maybe expecting to have to take those expenses out of their deductions for 2020, right? And so now they can just not have to worry about separating those out.

Sherr: Yes, they’ll be able to not have the taxable income, and they will be able to deduct the ordinary and necessary business expenses that they use the PPP funds for.

Bonner: And you say that also applies for the — I think they’re taking applications now — for the second round of PPP loans, correct?

Sherr: Yes, they will. They will be included in that. Yes.

Bonner: OK, very good. And I know that the AICPA had advocated for a provision in the Consolidated Appropriations Act, the CAA, as we’re going to call it here, that would allow 501(c)(6) organizations to also be loan recipients, to participate in the PPP. Why is that important? And what happened with that?

Sherr: It’s important because it expands the amount of people and organizations that can take it. For the [Sec.] 501(c)(6) [organizations], we worked with the American Society of Association Executives, ASAE, to try to expand it to include 501(c)(6) organizations. And we met with the staffers on the Hill, and it’s a lot wider now than what they originally were thinking. It now allows up to 300 employees, and the lobbying limit is 15% that they are allowed to spend and still be eligible to take the PPP loans. And a lot of these organizations — it includes business leagues, chambers of commerce, state societies, visitors’ bureaus — it’s a lot more entities that needed relief that now can get that. So that’s helpful.

Bonner: Some of the earlier drafts of the legislation had cut that off at 50 employees, which would be only the smallest organizations, I should think. So 300 is — I would think that 501(c)(6)’s, most of them, are fairly small organizations, right?

Sherr: Right. Yes, it’s helpful.

Bonner: Yeah, and I understand that this includes some state CPA societies; is that correct?

Sherr: That is correct.

Bonner: One of the things we talked about once before, I forget how long ago, was, nearer the beginning of the coronavirus pandemic, that there were so many states that had mobile workforce conundrums here on what to do with all the people who weren’t coming in to the office anymore, and what state they could be taxed in, should be taxed in. And I know that there was some federal legislation that had been promoted. That did not make it into the CAA, did it?

Sherr: It did not, unfortunately. It was in the Senate Republican proposal, their original, big proposal. And, unfortunately, it did not get all the way enacted. But we continue to advocate for it. It would really help, especially during the pandemic. During 2020, the bill provided that you could be 90 days in a nonresident state working and not have to change your withholding and have any liability [to the nonresident state]. It would be really helpful. We’re hoping that it will get reintroduced in this new Congress and cover 2021 as well. There was also a provision in there that said you could keep your [state tax] withholding as it was before the pandemic, or it gave an opportunity of some flexibility. If the employer is tracking your remote location, then they could have withholding at the remote location instead. It gives a lot of flexibility, and I think it would help a lot of people that are working remotely.

Bonner: Yeah, I imagine, back in last April of 2020, we didn’t really imagine that in the new year, in 2021, we’d still be having the same issue. But maybe it won’t go on for too much longer. Are states still extending the relief that they provided earlier? Or have they ended doing that?

Sherr: Yes, many states are, and we have about 15 states that are providing guidance that during the pandemic, basically, while there are still emergency orders in effect in the states and the governor has issued an emergency order in that state, I think that the guidance would cover that.

Bonner: At some point, someone will say there is no longer an emergency, I suppose. But I don’t know when that will be. I wonder if anyone has any idea —

Sherr: We’ll see. We’ll see what happens.

Bonner: — what criteria they have, even for declaring an end of an emergency. I don’t even know that anybody has hammered that out, have they?

Sherr: I haven’t heard.

Bonner: Yeah, it would be interesting to see. Well, also looking ahead to the end of the pandemic, whenever it may be, also reminds me that we look ahead to a new administration and a new configuration of Congress. Last time we spoke, we did a little blue-sky hypothesizing about — well, not hypothesizing, but detailing what a Biden administration had said would be some of their tax proposals. And now we have a Biden administration for certain. Has that list changed in any way? Are there any of those provisions that are more likely than others to see some legislative action in the new Congress?

Sherr: Good question. I think we’re going to have to wait until the Biden administration, first of all, gets settled and gets started. And usually, the administration sends a budget proposal to Congress. And it’s usually released in February or March. In the beginning of a new administration, it’s usually closer in the March time frame. We’ll have to wait to see. And that includes a lot more details, a little more meat to the bones on what’s going on with each proposal that they’re thinking of and what they want Congress to consider. And then Congress is going to probably have hearings. I assume they usually have the secretary of Treasury come in and explain what they’re asking for. And then they’ll have, potentially, hearings and markups, and we’ll get a lot more details as they move along in the process.

I think the credits that Biden had initially mentioned, like the childcare tax credit, or the child credit, I think those potentially could be considered as part of any COVID relief package they might actually do in the beginning of the year. So, I think you might see some of the things to help families, I think, would probably move ahead. And if they need any revenue raisers, they’re likely to consider the higher income tax rate issues, maybe the corporate rate issues, as maybe bringing in a little bit more money and to pay for some of the things that they need. So those are all possible.

Bonner: So, with the tax priorities that we do know of for 2021, like getting a mobile workforce bill passed, that, of course, remains a priority for the AICPA, as you said. Are there any others that come to mind that you’ll definitely be pursuing in your advocacy?

Sherr: Definitely, COVID pandemic issues are front and center for us. [Regarding] the employee retention credit, we are sending in a letter today to IRS asking for more guidance on the new changes to the employee retention tax credit, especially with regard to the PPP program and how the wages interact, tracking of those things.

We just came out also with recommendations for the states on conformity with the PPP to the federal legislation that was just enacted. [Regarding] PPP forgiveness and PPP expense deductibility, if the states could at least provide guidance if they’re going to conform or not, that would be helpful. We’re reaching out to the state societies.

Bonner: Oh, my goodness, I hadn’t thought about state conformity to the CAA provisions, especially with regard to PPP. It might be that a state would say, “You know what? We think IRS had it right the first time; we’re going to stick with that.” They could, couldn’t they?

Sherr: Yes. And we’re actually tracking it within the AICPA. Some states already have provided guidance. So far, Alabama, California, Connecticut, D.C., Hawaii, Iowa, Kentucky, Massachusetts, Mississippi, Montana, New York — New York came out with it today — North Carolina, Ohio, South Carolina, Tennessee, Utah, and Wisconsin all say they will conform with the forgiveness part. Only Alabama and New York have said they will conform with the PPP loan deductibility issue [and provide]  expense deductibility. And the ones that have said they will not conform with the forgiveness is Maine and Massachusetts, for individuals. When I said they conformed, it was corporate tax with Massachusetts before. And the only state that we know of so far that is not conforming with the loan expense deductibility is North Carolina.

Bonner: Oh, really, my own state. How about that?

Sherr: At least that was before. I think I’m not sure when that guidance came out. They may potentially revisit it now that the federal government has come out with it.

Bonner: Oh, I see. They haven’t taken that into consideration yet.

Sherr: I had the list from early in December. Except New York just added it today.

Bonner: I see. OK, well, we’ll definitely want to stay tuned on that because if you’ve still got to take out your deductions for your state income tax, it’s still an onerous administrative burden, at the very least.

Sherr: Right. And you asked me about the other priorities — we’re also working, obviously, with the IRS on penalty relief. A lot of people have had issues with IRS processing the mail and having notices that they’ve received for late filing or things that IRS didn’t realize that had been extended or other situations. We are working with IRS on that. Also, with e-signatures; that continues to be a priority for us. And then the CARES Act implementation and the Consolidated Appropriations Act implementation, as IRS comes out with guidance, we’re definitely going to be engaged in that.

Bonner: Lots of guidance needed in a lot of those provisions, especially the new ones. We didn’t think we’d get into this, but I noticed the 100% deductibility of business food and beverage — sorry, I can’t help talking about that. It just seems so momentous to allow that for food and beverages provided by a restaurant. I thought instantly, what does “provided by a restaurant” mean? And what might it not mean? There’s some guidance right there, isn’t it?

Sherr: Right, exactly. There’ll be clarification of exactly what’s involved in that.

Bonner: So, lots of topics there for you all to ask for guidance on, for the TRPs, the technical resource panels, and committees of the AICPA.

So, I think that about covers it. Thank you.

Sherr: Sure. And we have a website that our comments are in for tax advocacy. If you go into the AICPA webpage and go into Advocacy and Tax, you’ll get to our comment letters, if anybody has questions about that. And there’s lots of resources the Tax Section has developed on the acts that have come out and going forward. So, just stay tuned. We’ll be working on it.

Bonner: OK, very good. Thank you.

Sherr: Sure. Thank you, Paul.