On December 27, 2020 President Trump signed the Consolidated Appropriations Act 2021 which includes the COVID-related Tax Relief Act of 2020 (“COVIDTRA”). Below is a summary of certain important loan forgiveness clarifications included as parts of COVIDTRA:
Tax Treatment of PPP Loan Forgiveness
Sec. 1102 of the CARES Act provides that a recipient of a PPP loan may use the loan proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations. If a PPP loan recipient uses their PPP loan to pay such costs and expenses, such recipient can have its loan forgiven in an amount equal to such costs and expenses paid by such recipient. Further, PPP loan forgiveness doesn’t result in taxable income to a PPP loan recipient and the Internal Revenue Code generally doesn’t allow a taxpayer to deduct expenses that are paid with tax exempt income. However, Sec. 276 of COVIDTRA clarifies a PPP loan recipient whose PPP loan is forgiven is allowed a deduction for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of such recipient’s assets will not be reduced as a result of the PPP loan forgiveness. This provision is effective as of the date of enactment of the CARES Act.
Tax Treatment of EIDL Loan Forgiveness
The CARES Act expanded access to Economic Injury Disaster Loans (EIDL) and established an emergency grant to allow an EIDL applicant to request a $10,000 advance on that loan. The CARES Act also provided loan repayment assistance for certain CARES Act loan recipients. Sec. 278 of COVIDTRA clarifies that an EIDL applicant’s gross income for federal income tax purposes does not include forgiveness of EIDL loans, emergency EIDL grants, and certain loan repayment assistance. Further, Sec. 278 of COVIDTRA also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that the tax basis and other attributes of an EIDL applicant’s assets tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. This provision is effective for tax years ending after the date of enactment of the CARES Act. (March 26, 2020).