Most of you are probably aware that Congress recently passed another stimulus bill that brought great news to those who have taken a Paycheck Protection Program (PPP) loan in 2020. What you may not be aware of is that this bill indirectly also brings good news to your 2020 Research and Development Tax Credit!
The stimulus bill, formally titled the Consolidated Appropriations Act, 2021, provides over $900 billion in additional federal funding to assist individuals and businesses impacted by the COVID-19 pandemic. The bill was passed by Congress on December 21, 2020, along with a companion $1.4 trillion bill that provided government funding and avoided a government shutdown on December 29, 2020. After some debate, President Trump signed these bills into law on December 26, 2020. The bills were far-reaching and included the much-debated second round of direct stimulus payments to individuals and enhanced unemployment benefits, as well as introducing a second round of PPP loans to qualifying businesses.
The provision we are focusing on in this blog is the long-awaited restoration of deductions related to PPP loan forgiveness. When the PPP loans were introduced by the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020, Congress stated they intended that the loans’ eventual forgiveness would not be taxable. Shortly thereafter, the IRS threw everyone a curveball when they cited certain provisions of the Internal Revenue Code that said that any expenses associated with non-taxable income could not be deducted. While many members of Congress immediately stated their opposition to the IRS’ position, many months went by without action to reverse the IRS’ controversial position. In fact, in November 2020, the IRS doubled down, stating that not only were the expenses not deductible, they also needed to be added back to taxable income in 2020 if there was a “reasonable expectation” that you would eventually be granted forgiveness of your PPP loan. This very unwelcome news meant many companies and their owners would be facing significantly higher 2020 tax bills while still trying to deal with the fallout of COVID-19.
While this news was bad enough, the IRS’ position raised even more levels of uncertainty. The primary driver for PPP loan forgiveness was to use the funds to retain jobs and maintain salaries. Salary costs also drive many other tax provisions, including the Research and Development Tax Credit. While never addressed directly by the IRS, many theorized that if you can’t deduct the salaries against your taxable income, you also would not be able to count them in your R&D Tax Credit computations or any other tax provisions based on salary costs. This uncertainty potentially brought a ripple effect to 2020 taxable incomes and created much angst in how to deal with unexpected tax liabilities while still trying to keep business afloat during the pandemic.
The Consolidated Appropriations Act, 2021 finally brought us the news Congress promised and that we have been patiently waiting for. The Act fully restores deductibility for all expenses utilized to calculate PPP loan forgiveness. As a result, there will also be no limitations on using those same salaries to compute the R&D Tax Credit and other wage-based benefits. This was welcome news and even had another unexpected pleasant surprise. The Act also allows those companies who utilized the PPP program to potentially benefit from Employee Retention Credits (ERC). While beyond the scope of this communication, it should be noted that the CARES Act had precluded those companies taking a PPP loan to also benefit from the ERC. The ERC rules are complex, but most companies should at least consider whether they can secure some additional benefits from these new provisions.
To hear more about the provisions of the recent stimulus bill, you may access Stambaugh Ness’ recent webinar, Breaking News: December Stimulus Bill Overview and What It Means For You, on-demand.
For additional insight, watch our on-demand webinar, Side Effects: How COVID Impacts R&D Credits, to hear the latest on the credit and how you can maximize your benefits.
Tom Moul, CPA | Director, Strategic Tax Advisory Services Group
Tom specializes in customized planning that increases tax efficiency by considering the unique big-picture needs and goals of each client. Working closely with companies, Tom outlines steps to minimize taxes, identify alternatives, and understand tax implications, and structure transactions.
Additionally, Tom applies his tax expertise to clients who are conducting or considering conducting international business ventures. His love of sports has given Tom an appreciation for the positive impact of coaching which he applies to his every day work by helping and encouraging others.