Before Congress clarified the deductibility of forgivable loans under the Paycheck Protection Program (PPP) in December, the ability of PPP loan recipients to also qualify for Research and Development Tax Credits (R&D) was in question. The R&D tax credit, which is a permanent federal tax incentive meant to stimulate innovation, technical design and manufacturing, allows businesses to save tens of thousands of dollars for activities they routinely conduct. These savings can offset wages and salaries paid for qualified activities.
Paycheck Protection Program Provisions
Under the CARES Act approved last March, Congress launched the PPP to help small and midsize businesses adversely affected by the pandemic to remain afloat by providing funds for payroll, mortgage (interest) payments, utilities and rent. The loans are forgiven as long as the business meets certain guidelines. At least 60% of the PPP loan must be used for employee wages.
PPP vs. R&D?
Under the CARES Act, PPP loans were excluded from taxable income. For businesses that count on valuable R&D tax credits, it appeared that loan forgiveness, whether partial or whole, could cause 2020 qualified research expenses (QRE) to become ineligible for the tax credit. Under the R&D tax credit program, a business can’t claim an R&D tax credit for non-deductible expenses. In other words, salaries paid to employees using forgiven loans would be ineligible as QREs, therefore affecting the ability for business owners to receive valuable federal and state tax credits.
Congress Restores Deductibility of PPP Loan Expenses
A $900 billion stimulus bill passed by Congress in December provides another $285 billion for second-round PPP funding, also called PPP2, with several changes in eligibility requirements. The good news is that Congress included language to allow expenses funded with PPP loans to be deducted, and the change is retroactive to the beginning of the CARES Act. This clears the way for businesses to deduct payroll taxes and related expenses.
R&D Tax Credits Remain a Strong Tax Incentive
Now that the tax deductibility of business expenses funded with PPP loans has been restored, these expenses can be used for calculating payroll-based R&D expenses used in qualifying for the R&D tax credit.
If your business qualifies for R&D tax credits, the change in law means you can proceed as you have in the past. A simple R&D tax credit study, conducted by qualified R&D tax credit experts, is needed to qualify. You should always work with your specialty tax advisors to determine the eligibility and calculations of R&D credits to obtain the best possible value for your company.
The tax and engineering experts at Engineered Tax Services have helped companies of all sizes across the U.S. identify and qualify for tax credits. To learn more about R&D tax credits, call Engineered Tax Services at (800) 236-6519.