Tax-related changes to Paycheck Protection Program: In addition to renewing the CARES Act’s Paycheck Protection Program (PPP), allowing “second draw” loans for certain previous borrowers, streamlining the loan forgiveness process for smaller borrowers, and capping the aggregate PPP loan amount that can be received across a business’s multiple locations, this week’s House bill would make a handful of tax-related PPP changes that also appeared in the original Heroes Act:

• Clarify deductibility of expenses funded by forgiven PPP loan funds: The revised Heroes Act clarifies that otherwise deductible expenses funded with PPP loan funds remain deductible even if the loan is forgiven and not included in the taxpayer’s gross income. The IRS held in Notice 2020-32 that these expenses are not deductible. (For prior coverage, see Tax News & Views, Vol. 21, No. 24, May 1, 2020.) But some prominent congressional taxwriters, including Senate Finance Committee Chairman Charles Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., along with House Ways and Means Committee Chairman Richard Neal, D-Mass., subsequently challenged that position in a letter to Treasury Secretary Steven Mnuchin, arguing that it was contrary to congressional intent and urging the Service to reconsider. Several Finance Committee members also introduced legislation that would clarify the treatment of these expenses. (For prior coverage, see Tax News & Views, Vol. 21, No. 25, May 8, 2020.)

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• Clarify deductibility of expenses related to other grant and loan programs: The revised Heroes Act provision likewise would clarify the deductibility of expenses paid with proceeds from certain other grant or loan programs – even if not required to be repaid – including those received under section 1109 (US Treasury Program Management Authority), section 1110 (Emergency Economic Insurance Disaster Loan grants) and section 1112 (subsidies for certain loan payments) of the CARES Act. Similar treatment would also be extended to amounts received by food establishments under the Real Economic Support That Acknowledges Unique Restaurant Assistance Needed To Survive (RESTAURANTS) Act of 2020 – a new proposed grant program that is included as section 607 of Title VI of the revised Heroes Act.
• Include certain interest, PPE, inventory, and property damage costs as eligible expenses for PPP loan forgiveness: In addition to payroll, mortgage interest, rent, and utility costs, this week’s House bill would add to the list of expenses under section 1106(b) of the CARES Act that can give rise to PPP loan forgiveness certain interest on debts incurred prior to the covered period of PPP and costs related to providing personal protective equipment (PPE) to employees. In a change from the original Heroes Act, the current version also would include under section 1106(b) payments for inventory and raw materials, as well as payments related to property damage, vandalism, or looting during 2020 that was not otherwise covered by insurance.

A new PPP tax-related change included in this week’s bill – that was not part of the original Heroes Act – would allow “qualified wages” to be included in an employer’s calculation of the employee retention tax credit if the PPP loan is not forgiven.