personal finance

Here's Why a Second Round of PPP Loans Could Fall Short for Battered Small Businesses

Kevin Lemarque | Reuters
  • Bipartisan lawmakers introduced a new Covid-19 stimulus package on Tuesday morning, amounting to $908 billion. Of that amount, $288 billion is earmarked for small business aid, including the Paycheck Protection Program.
  • Senate Majority Leader Mitch McConnell shot down the proposal Tuesday afternoon, bringing lawmakers back to the drawing board.
  • Small businesses are in need, but may hesitate to jump at another tranche of PPP loans if obtaining funds and wiping the balance proves to be too complicated, tax professionals said.

Senate Majority Leader Mitch McConnell, R-Ky., quashed a new Covid-19 rescue bill hours after it was proposed on Tuesday, leaving small businesses uncertain about their future.

Bipartisan lawmakers introduced a $908 billion relief package on Tuesday morning. The measure was dead in the water by that afternoon, when McConnell rejected it.

The measure would have set aside $288 billion in aid for small businesses, including offering firms a second round of loans through the Paycheck Protection Program — a forgivable loan program established by the CARES Act this spring.

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Recipients of PPP loans are generally eligible for loan forgiveness if they use at least 60% of the proceeds to cover payroll costs. Those who fall short of the threshold may be eligible for partial forgiveness.

McConnell's veto sends lawmakers back to the drawing board, where they may have another opportunity to fine-tune business relief.

Merely offering more PPP funding might not be enough for cash-strapped businesses, tax professionals said.

"You're going to have a group of people who will be worried about taking more PPP funding," said Megan Gorman, founding partner of Chequers Financial Management in San Francisco.

 "They haven't gotten the guidance they need for the first round, and they're figuring out whether they'll be able to make it through," she said.

Constantly changing guidance

Sen. Angus King (I-Maine) holds a chart as bipartisan members of the Senate and House gather to announce a framework for fresh coronavirus relief legislation at a news conference on Capitol Hill on Dec. 1, 2020.
Kevin Lemarque | Reuters
Sen. Angus King (I-Maine) holds a chart as bipartisan members of the Senate and House gather to announce a framework for fresh coronavirus relief legislation at a news conference on Capitol Hill on Dec. 1, 2020.

Aside from offering a second draw for PPP loans, the proposal that was quashed on Tuesday would have ensured recipients of aid won't be taxed on the first round of forgivable loans, and it offers simplified forgiveness for loans under $150,000, said Rep. Josh Gottheimer, D-N.J., on Tuesday morning at a press conference on Capitol Hill.

He was among the lawmakers working on the proposal.

More than 5 million PPP loans — $525 billion in funding — were approved earlier this year.

The program has run into its share of difficulties over the course of the year, including the steady rollout of guidance from Treasury and the Small Business Administration in the form of "frequently asked questions."

Another bone of contention has been whether small businesses can deduct expenses that are covered by the loan.

The position at the Treasury and IRS has been that since forgiveness of the loan is tax-free, borrowers can't deduct expenses. On the other hand, lawmakers have proposed legislation that will permit the write-offs.

Treasury and the IRS said last month that business owners who "reasonably believe" their PPP loans will be forgiven can't deduct the costs.

All of this has resulted in more confusion for businesses: Being unable to deduct the expenses could inflate their income on paper and boost their tax bill, tax professionals said.

The new framework lawmakers released on Tuesday mentions "deductibility," but there are no details on how this would unfold for small businesses.

Cold feet from prospective borrowers

Even though small businesses could use the funding, they're skittish about taking aid that will result in more complexity and uncertainty.

"They're going to have post-traumatic stress disorder from that first round," said Tony Nitti, CPA, a partner in RubinBrown's tax services group in Denver.

"If they clean up the problems from the first round, there will be more interest from borrowers," he said. "If people go into it knowing there's blanket forgiveness for loans under $150,000, you're going to see a lot of people sign up for this.

"But nobody wants to go through this process that we went through again," Nitti said.

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