Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo

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Is it “Tax-Free Money” or is it a “Loan”

Did you receive money from a lender under the existing Paycheck Protection Program (PPP)? If so, you may qualify for more tax-free money. But first, let’s clarify what’s happening. When you think of the PPP program, do you think “Tax-Free Money” or do you think “Loan”?

Think “tax-free money.” That’s what it is. And it’s easy.

Sure, it comes in the form of a loan, and you could be under the mistaken impression that you have to pay it back—but you don’t. You just have to use 60 percent or more of it for defined or deemed payroll. That’s the good news part. 1

The expenses you pay with the forgiven PPP monies are tax-deductible. It’s the perfect deal. Take advantage if you can.

1. How Do You Qualify for the New Second-Draw PPP Money?

Planning Note: This article is about “Second-Draw” PPP money. If you failed to apply for the PPP money during 2020, Lawmakers set aside $35 billion for those who had not previously received a PPP infusion of tax-free money.

So, keep this in mind, if you obtain your first PPP money soon, you likely can spend that, and then, if you qualify, obtain a second PPP cash infusion under the second-draw rules.

To qualify for the Second-Draw PPP money, you must: 2

1. Have 300 or fewer employees
2. Have suffered a 25 percent or greater loss in revenue during at least one quarter of 2020 when compared to 2019; and
3. Have already used your original PPP money or be planning to use it soon.

Example: John had $1 million in quarterly revenue during the 2019 third quarter. In 2020, John’s third-quarter showed revenue of $700,000. John meets the “25 percent or greater loss in revenue” test.

For the business that did not operate during all of 2019, alternate tests are available, such as comparing the fourth quarter of 2019 to the first, second, or third quarter of 2020.2

2. How Much Can You Get?

The mechanics of the Second-Draw PPP Loan amount follow the basic rules that apply to the original (first-draw) PPP loan, with some modifications such as the following:

• The loans are capped at $2 million or less.
• If you are not a hotel or restaurant, i.e., North American Industry Classification System (NAICS) code 72,4 you identify your average monthly payroll for either 2019 or the trailing 12 months, and then multiply it by 2.5 to find your loan amount.
• If you are a hotel or restaurant, you multiply by 3.5.

As of January 14, 2021, the Second-Draw Interim Final Rulings (IFR) issued on January 6, Treasury exercised its authority under section 1109 of the CARES Act to allow borrowers of Second-Draw PPP loans to use 2019, 2020, or the trailing 12 months to calculate their maximum loan amount.

Example: Sam has a 2019 defined payroll for PPP purposes of $1,200,000, or $100,000 a month. He operates a restaurant. His second-draw PPP loan is $350,000 ($100,000 x 3.5).

Planning point: It is your choice whether to use the 2019 or lagging-12-months payroll period, but often the lenders will want 2019 because that’s easy to verify. But, if you think your lagging-12-month period is best, fight for it.

3. What Can You Use the Money For?

During a period of your choice, beginning eight weeks from the origination date of the loan and ending 24 weeks from the origination date, you must use 60 percent or more of the monies for defined and/or deemed payroll to achieve 100 percent forgiveness.

Example: Wendy obtains $100,000 in Second-Draw PPP monies. She spends the entire $100,000 during the nine weeks following the date she received the loan, and of that, $65,000 was for payroll. She spent the remaining $35,000 on other covered expenses. Wendy qualifies for 100 percent loan forgiveness.

4. Other Covered Expenses

To obtain 100 percent forgiveness, you must spend all the PPP money on covered expenses and at least 60 percent of that on defined and/or deemed payroll. In addition to payroll, covered expenses include the following:

• Rent
• Interest on Mortgage Obligations
• Utilities
• Operations Expenditures
• Property Damage
• Supplier Costs
• Worker Protection

Example: Janet obtains a $100,000 loan but uses only $48,000 (48 percent) for payroll. The PPP rules limit Janet’s total loan forgiveness to $80,000 ($48,000 ÷ 60 percent).

5. Expenses Are Deductible

Before the recent stimulus, the IRS took the position that expenses paid with PPP loan monies that were forgiven were not tax-deductible. Some lawmakers disagreed, but the IRS held firm and told those lawmakers that if they didn’t like the IRS position, they should change the law. So they did. Now, thanks to the new law, expenses paid with PPP loan monies that are forgiven are tax-deductible. 3

6. Act Fast

If you qualify for and want the tax-free money from PPP Round 2, don’t procrastinate. When the allocated monies are gone, the funding is over.

Takeaways

If you received an initial PPP loan, you can qualify for a second round (called a “Second-Draw”) of PPP Tax-Free money.

To qualify for the second-draw PPP money, you must:

1. Have 300 or fewer employees
2. Have suffered a 25 percent or greater loss in revenue during at least one quarter of 2020 when compared to 2019; and
3. Have already used your original PPP money (or be planning to use it soon).

The mechanics of the second-draw PPP loan amount follow the rules that apply to the original (first-draw) PPP loan, with some modifications. The overall limits work as follows:

• The loans are capped at $2 million or less.
• If you are not a hotel or restaurant (NAICS code 72), you identify your average monthly payroll for either 2019 or the trailing 12 months, and then multiply it by 2.5 to find your loan amount.
• If you are a hotel or restaurant, you multiply by 3.5.

During a period of your choice, beginning eight weeks from the origination date of the loan and ending 24 weeks after the origination date, you must use 60 percent or more of the monies for defined payroll to achieve 100 percent forgiveness.

Expenses that can qualify for forgiveness include:

• Payroll
• Rent
• Interest on Mortgage Obligations
• Utilities
• Operations Expenditures
• Property Damage
• Supplier Costs
• Worker Protection

And finally, keep these three thoughts in mind:

1. Act fast, because this money goes in a hurry.
2. The incoming PPP loan monies are tax-free.
3. Expenses paid with PPP loan monies that are forgiven are tax-deductible.

You will not find a better bargain!

Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo

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Daniel Morris
Daniel frequently provides Media Content via Workshops, Podcasts, and Printed Articles on topics like Bitcoin and Cryptocurrency, Wealth Preservation and Planning, Global Banking, and many other high-level financial topics that serve and demonstrate the Value of our Global Network that should be of interest to those who need Private High-Wealth Services.

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