Appropriations Law Addresses PPP Forgiveness, Tax Treatment
ADAM M. LEVINE, CPA, CFP
The Consolidated Appropriations Act (CAA), signed into law in late December 2020, allocated additional funding for forgivable loans through the Paycheck Protection Program (PPP) — for both first-time and so-called “second-draw” borrowers who have been hit by the economic effects of the COVID-19 pandemic. It also includes several critical provisions related to loan forgiveness and tax treatment that should be of interest to all PPP borrowers.
Related Read: President Signs a New Stimulus Package
To qualify for full forgiveness of a PPP loan, borrowers must spend at least 60% of the funds on payroll over their covered period — between eight and 24 weeks. Under the CARES Act, which created the PPP, borrowers could apply the funds only to payroll, mortgage, rent and utility payments. The CAA expanded the types of nonpayroll costs that can be paid with PPP funds to include:
- Covered operating expenses, defined as software or cloud computing services that facilitate business operations; product/service delivery; payroll processing; human resources; sales and billing; or accounting or tracking supplies, inventory, records and expenses;
- Uninsured costs related to property damage and vandalism or looting during 2020 public disturbances;
- Supplier costs pursuant to a contract, purchase order or order for goods, in effect before taking out the loan, that are essential to the borrower’s operations; and
- Worker protection expenses — such as personal protective equipment, ventilation systems and drive-through windows — incurred to comply with federal or state health and safety guidelines related to COVID-19.
In addition, the CAA establishes a simplified one-page forgiveness application for loans up to $150,000. Borrowers are required to certify the number of employees retained due to the loan, the estimated total amount of funds spent on payroll and the total loan amount. Borrowers must retain records documenting employment for four years and other records for three years.
The CAA also increased the amount that can be forgiven for borrowers who received Economic Injury Disaster Loan (EIDL) advances. It eliminates the previous requirement that borrowers deduct the amount of these advances from their PPP forgiveness amount.
The CAA tackled several tax-related questions that popped up since the enactment of the CARES Act. For example, the CARES Act provided that a borrower did not need to include any forgiven PPP proceeds in its gross income. Generally, forgiven debt is included as income from the discharge of indebtedness.
However, in Notice 2020-32, the IRS declared that no tax deduction was allowed for expenses that are otherwise deductible if they were paid with forgiven PPP amounts. The CAA overruled this controversial IRS guidance, allowing borrowers to reduce their taxable income by deducting such expenses.
The law also provides that loan forgiveness does not reduce tax basis and other tax attributes. (Special rules apply to partnerships and S corporations.) This and the other tax provisions apply to both first- and second-draw loans.
Related Read: Three Provisions for the Real Estate World
Much, much more
The CAA contains numerous other provisions that may be relevant to real estate businesses. For example, it addresses depreciation of residential rental real estate, Empowerment Zones and employer retention tax credits. It also extended several popular tax breaks, including the New Markets Tax Credit and the Work Opportunity Tax Credit.
Illinois Homeowners: Relief Is on the Way
ANITA S. WESCOTT, CPA
Economic hardships brought about by the COVID-19 pandemic have caused many homeowners to fall behind on their mortgage and other housing-related payments. To provide some relief, Congress established the Homeowner Assistance Fund (HAF) as part of the American Rescue Plan (ARP), enacted in March 2021. The fund consists of nearly $10 billion to be distributed among the states, territories and tribes by the U.S. Department of Treasury. Illinois’ share of the fund is approximately $387 million, managed by the Illinois Housing Development Authority (IHDA). The IHDA expects applications to be available this fall. Approved applicants will be eligible for up to $25,000 in assistance.
Who is Eligible?
Although the IHDA is still working out the details of its program, according to Treasury Department guidance, homeowners are eligible to receive assistance if they experienced financial hardship after January 21, 2020 and have incomes up to 150% of the area median income. In the Chicago-Naperville-Joliet area, for example, the median income for a four-person household is $93,200 and 150% of that amount is $139,800. HAF relief is available only for qualified expenses related to the homeowner’s primary residence. Mortgage-related relief is limited to mortgages on a borrower’s principal residence that is, or includes, a one- to four-unit dwelling, provided the principal does not exceed the Fannie Mae and Freddie Mac conforming loan limits.
Under the ARP, at least 60% of allocated HAF funding must be used for homeowners with income at or below the area or national median income, whichever is greater, and the remaining funds must be prioritized for “socially disadvantaged” individuals.
Treasury defines “financial hardship” as “a material reduction in income or material increase in living expenses associated with the coronavirus pandemic that has created or increased a risk of mortgage delinquency, mortgage default, foreclosure, loss of utilities or home energy services, or displacement for a homeowner.”
How Can the Funds Be Used?
The HAF is intended to help homeowners avoid mortgage delinquencies and defaults, foreclosures, loss of utilities or home energy services, and displacement as a result of financial hardship. According to Treasury Department guidance, recipients may use the funds for several qualified expenses, including:
- Mortgage payment assistance;
- Financial assistance to reinstate a mortgage or pay other housing-related costs related to a period of forbearance, delinquency or default;
- Mortgage principal reduction;
- Facilitation of interest rate reductions;
- Payment assistance for utilities, internet service, insurance (homeowner’s, flood, or mortgage), and homeowner’s association fees or similar charges;
- Payment assistance for delinquent property taxes to prevent tax foreclosures; and
- Measures to prevent homeowner displacement, such as home repairs to maintain habitability or assistance to secure clear title to the property.
Funds may not be used for any purpose other than those enumerated in the ARP and Treasury Department guidance. However, the Treasury Secretary may expand the list of qualified expenses to include other assistance that promotes housing stability for homeowners.
If you have fallen behind on housing-related payments as a result of the pandemic, keep an eye out for IHDA updates on Illinois’ HAF program. Your ORBA advisor can help you determine your eligibility.
For more information about COVID-19-related relief for property owners, please contact your ORBA advisor or Anita Wescott at [email protected]. Visit ORBA.com to learn more about our Real Estate Group.