PPP Loans: What 2020 Borrowers Need to Know in 2021 & Why the Child Tax Credit is so Valuable
PPP Loans: What 2020 Borrowers Need to Know in 2021
Almost a year ago, the Paycheck Protection Program (PPP) was launched in response to the COVID-19 crisis. If your company took out such a loan, you’re likely curious about the tax consequences — particularly for loans that have been forgiven — and also about the launch of “second-draw” PPP loans.
An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of various costs incurred and payments made during the covered period. These include payroll costs, interest (but not principal) payments on any covered mortgage obligation (for mortgages in place before February 15, 2020), payments for any covered rent obligation (for leases that began before February 15, 2020), and covered utility payments (for utilities that were turned on before February 15, 2020). Also eligible are covered operations expenditures, property damage costs, supplier costs and worker protection expenses.
Your covered period would normally have been the 24-week period beginning on the date you took out the loan (ending no later than December 31, 2020, if that was before the expiration of the 24-week period). If you received a PPP loan before June 5, 2020, you could elect a shorter 8-week covered period. If you didn’t elect the 8-week period and instead used the longer 24-week period, you had to maintain payroll levels for the full 24 weeks to be eligible for loan forgiveness. If you didn't make an election, the 24-week period applies.
An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered lease obligation or make covered utility payments.
Cancellation and deductibility
The reduction or cancellation of indebtedness generally results in cancellation of debt income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) won’t generally be reduced on account of this exclusion.
The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. The IRS took the position that these expenses were not deductible. However, under the Consolidated Appropriations Act (CAA), enacted at the end of 2020, expenses paid from the proceeds of PPP loans are deductible.
“Second-draw” PPP loans
Under the CAA, eligible businesses may be able take out so-called “second-draw” PPP loans. These loans are primarily intended for beleaguered small businesses with 300 or fewer employees that have used up, or will soon use up, the proceeds from initial PPP loans. The maximum second-draw loan amount is $2 million, and only one such loan can be taken out.
To qualify for a second-draw loan, a business must demonstrate at least a 25% decline in gross receipts in any quarter of 2020 as compared to the corresponding quarter in 2019. Qualifying businesses can generally borrow up to 2.5 times their average monthly payroll costs for either the one-year period before the date on which the loan is made or calendar year 2019. The application deadline is March 31, 2021.
A PPP loan may complicate your company’s 2020 income tax filing, but a second draw could provide a much-needed influx of cash. Please contact us with any questions you might have.
Why the Child Tax Credit is so Valuable
If you’re a parent, or soon will be, you’re no doubt aware of how expensive it is to pay for food, clothes, activities and education. Fortunately, the federal child tax credit is available to help many taxpayers with children under the age of 17, and there’s a dependent credit for those who are eligible with older children.
An expanded break
Before the Tax Cuts and Jobs Act (TCJA) kicked in, the child tax credit was $1,000 per qualifying child. But it was reduced for eligible married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers).
Starting with the 2018 tax year, and applying through the 2025 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. It also created a $500 credit per dependent who isn’t a qualifying child under 17. There’s no age limit for the $500 credit, but IRS tests for dependency must be met.
The TCJA also substantially increased the thresholds at which the credit begins to phase out. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000. The threshold is $200,000 for other taxpayers. So, many taxpayers who were once ineligible for the credit because their AGI was too high are now eligible to claim it.
In order to claim the child tax credit for a qualifying child, you must include the child’s Social Security number (SSN) on your tax return. Under previous law, you could instead use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).
If a qualifying child doesn’t have an SSN, you won’t be able to claim the $2,000 credit. However, you can claim the $500 dependent credit for that child using an ITIN or an ATIN. The SSN requirement doesn’t apply for non-qualifying-child dependents but, if there’s no SSN, you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.
Don’t miss out
The changes made by the TCJA generally increase the value of these credits and widen their availability to more taxpayers. Please contact us for further information or ask about it when we prepare your tax return.