After nine months of negotiations, Congress has at last passed a second stimulus bill, allocating $284 billion to a new round of Paycheck Protection Program (PPP) loans. And it includes a clarification many advisors and business clients have been waiting for—a provision that PPP loans will not be taxable when forgiven.

The legislation is still awaiting President Trump's signature, but the tax provision and new PPP funding are welcome relief to business owners and their financial advisors.

“It's what we were waiting for,” said Leon C. LaBrecque, chief growth officer at Sequoia Financial, a national wealth management firm headquartered in Akron, Ohio. “It's what Congress wanted, despite the IRS and Treasury Secretary [Steven] Mnuchin’s declarations otherwise. Yes, our clients were worried, and we advised, ‘Wait until someone gets some sensibility,’ And they did.”

The legislation says that forgiven PPP loans will not be taxable to small business borrowers; that applies to all existing PPP loans made under the original Coronavirus Aid, Relief, and Economic Security Act, as well as the new second-draw PPP loans.

The new PPP funding and tax clarification helps, said LaBrecque. “It helps directly, through making the PPP what Congress intended it to be, and it helps indirectly through [net operating loss] carrybacks. We think it was always supposed to be deductible and are happy it's in the bill.”

Before the legislation, the IRS had issued guidance to small businesses saying that PPP borrowers could not expense their wages and other qualifying costs that they used their PPP funds on if they ended up getting the loans forgiven. By denying the deduction, the IRS was effectively taxing the small business for its PPP loan, advisors said.

“Clients and CPAs have been pulling their hair out at year end,” said Jeff H. Farrar, co-founder and executive managing director at Procyon Partners in Wilton, Conn. “This was a great example of the bureaucracy not listening to what Congress wrote and intended in the CARES act with PPP loans. Not allowing the deductions effectively taxed the PPP loan, which was clearly not what Congress intended nor in the best interest of the many small business owners struggling to survive.”

According to a Treasury Department and IRS decision, which the new legislation will overturn, a business receiving a $100,000 loan wouldn’t count that as income, but would have to forgo $100,000 in deductions. In many cases, the loss of those deductions is mathematically equivalent to taxing the PPP loan.

If President Trump signs the legislation, a $100,000 PPP loan would not need to be counted as income, and the business could deduct $100,000 in related expenses. For a business owner in the top tax bracket, that is a $37,000 difference and would make the PPP loan more like a tax-free government benefit.

“I do not know of any business owner who would not have been negatively impacted by the original U.S. Treasury-IRS ruling,” said Sallie Mullins Thompson, a CPA and CFP in New York City. “The provision in the new law is very welcome news. The only caveat relates to any potential restrictions that may be added on pass-through reductions, which are unknown at this point.

“The second round of PPP loans will definitely help some of my clients, especially those in the hospitality and event planning industries,” she added.

Businesses, some nonprofit organizations, self-employed workers and independent contractors are among those eligible for the loans. Existing PPP borrowers may apply for a second loan, as long as they have 300 or fewer employees and can demonstrate that in a quarter of 2020 they experienced a 25% reduction in gross receipts from the same quarter in 2019.

The new legislation allocates around $284 billion to new PPP borrowing and refers to the new loans as second-draw loans. The loan limit is $2 million, and the amount a small business will qualify for is determined by taking its average monthly payroll in 2019 and multiplying it by 2.5. In other words, the second round of PPP loans is meant to fund 2.5 months of payroll expenses.

The bill has a special calculation for restaurants and food businesses and provides them with a larger loan amount of 3.5 months of average monthly payroll. So, for example, if you had an average monthly payroll in 2019 of $100,000, then your small business would qualify for $250,000. If you were a restaurant or other qualifying food business, you would qualify for $350,000.

To qualify for a second draw PPP loan, a small business must have 300 employees or fewer, a decrease from the original 500 employee maximum in the first round. And it must have already used or planned to use its original PPP funding. As they could under the original PPP loan program, small businesses can use the loan proceeds over a period of 24 weeks and can use the funds for payroll, rent and mortgage expenses. The bill also adds some new items to the list of qualifying expenses: operating expenses, workplace expenses on items that protect employees from Covid-19 and covered property damage.

To qualify for a second-draw loan, a small business must certify that it has suffered a revenue loss of 25% or greater. That is drastically different from the original qualification rules for PPP, which simply required the small business to state that economic uncertainty made the PPP loan necessary. The second-draw loans are forgivable, but 60% must be spent on payroll costs.