Congress has passed a COVID-19 relief package (Consolidated Appropriations Act, 2021) if this bill is signed by the President, significant changes will occur to the way PPP loan forgiveness is handled on your tax return. If your tax plan estimate contains an adjustment to expenses due to PPP loan forgiveness you may want to adjust your tax plan. If your tax plan includes decreases in expenses due to PPP forgiveness this change could increase the amount of expenses deducted and lead to a decrease in federal taxable income in your plan. Highlighted in yellow below is an excellent discussion on the tax implication of this change.
In addition guidance from the State of MN indicates that PPP forgiveness will be added back to MN Income. This could increase your MN taxable income. Highlighted in yellow below is a discussion of MN state PPP forgiveness conformity.
Contact your tax specialist or Garen Paulson if you have any questions
New COVID-19 relief passes Congress, includes PPP, EIDL and CFAP changes
December 22, 2020
This blog post is based upon the content of the COVID-19 relief package (Consolidated Appropriations Act, 2021) passed by the House and Senate on December 21, 2020. To become law, this legislation requires a Presidential signature or a veto override from both the House and the Senate. Currently, the bill is waiting for a Presidential signature and is not law.
by Megan Roberts, Extension educator
After months and months of negotiations, Congress passed a new COVID-19 relief bill as part of a larger end-of-year federal appropriations bill. The bill, H.R. 133, known as the Consolidated Appropriations Act (CAC), 2021, was passed in a late night legislative session on December 21, 2020.
The law notably changes the tax treatment of the Paycheck Protection Program (PPP) with just a few days left in the calendar year. Other parameters of the law of importance to farmers and other small business owners include a second round of PPP loans, new funding for targeted Economic Injury Disaster Loan (EIDL) advances, an infusion of new dollars to the United States Department of Agriculture (USDA), and continuation of several COVID-19 related employee tax credits. Not connected directly to business finances, but likely relevant to many reading this post, the law also includes a second round of Economic Impact Payments (EIPs) and funding for rural broadband and telehealth upgrades.
This article highlights major COVID-19 financial related provisions but does not provide a full comprehensive summary of the 5,593 page law. Rob Holcomb outlines additional tax changes in another blog post here.
Paycheck Protection Program (PPP)
The most time sensitive business planning news from this law affects PPP. For borrowers with employees, PPP expense deductions are now deductible on 2020 tax returns. For Schedule F sole proprietors and self-employed individuals, PPP Round 1 loans may now be based on gross income instead of net income, but only if forgiveness has not yet been received. Pausing on forgiveness until more information is available may be recommended for Schedule F filing sole proprietors.
Let’s dig deeper into PPP the changes. If you were a PPP borrower, the amount of your PPP loan (forgiven or reasonably expected to be forgiven) has been non-taxable gross income since PPP was created in the CARES Act last spring. However, the IRS stepped in this summer and said because income associated with PPP was tax-excluded they would not allow expenses associated with PPP to be deducted on your 2020 federal taxes. This new law usurps the IRS’s interpretation and very clearly states at the federal level PPP expenses are tax deductible (Division N, Title II, Section 276). This is welcome news for many PPP borrowers. With only a few short days left in the calendar year, it is important to adjust your tax planning estimates to include any PPP expenses that were formerly non-deductible.
For sole proprietors without employees, owner’s compensation is non-deductible to begin with, so the new law’s treatment of PPP expenses should not affect your expense deductions.
To read more about changes to the Economic Injury Disaster Loans (EIDL) and to learn more about Nutrition and agricultural relief, Employee sick leave, Stimulus checks to individuals, rural broadband and telehealth, and a possibility to apply for a PPP loan based on gross farm income rather than net farm income. Go to https://blog-abm-news.extension.umn.edu/2020/12/new-covid-19-relief-passes-congress.html
State of MN Tax conformity of PPP loan forgiveness
If a taxpayer secured a Paycheck Protection Program (PPP) loan in 2020, the forgiveness or potential forgiveness will need to be reported on the 2020 Minnesota income tax return. This reporting will be done on the 2020 Minnesota Schedule M1NC (Federal Adjustments). The form adjusts for any non-conformity with federal tax law at the Minnesota state level. With the passage of new COVID-19 relief legislation, also known as H.R.133 or the Consolidated Appropriations Act, 2021 (CAC), taxpayers are no longer required to reduce business expenses on the federal tax return by the amount of PPP loan forgiveness they received or expect to receive in the future. This causes the PPP loan forgiveness to be non-taxable on the federal return but taxable on the Minnesota return.
A Minnesota taxpayer with PPP loan forgiveness starts with PPP forgiveness and then subtracts the amount of reduced expenses from the Federal return. Since there will be no reduction of expenses on the federal return, the total amount of PPP loan forgiveness is an add back on the Minnesota return, thus increasing Minnesota taxable income.
For more discussion of this MN State Conformity go to https://blog-abm-news.extension.umn.edu/2020/12/minnesota-requires-adjustments-to-state.html
This information is educational in nature, and is not tax or legal advice.
Source information used for this post included The House Committee on Appropriation’s
H.R. 133 – Division-by-division summary of COVID-19 relief provisions, as well as the final H.R. 133 text as passed.