By Bryan Prescott, PharmD, MBA, PCCA Director of Management Coaching Services

The Consolidated Appropriations Act, 2021 is the much-anticipated U.S. COVID-19 relief bill signed into law on December 27, 2020. Notably, it updates the Paycheck Protection Program (PPP) that has helped many businesses, and it includes some changes that may be very helpful for your pharmacy. Here are some of the important updates.

Are the expenses covered by PPP funds tax deductible?

There is a lot of concern regarding the tax implications for PPP loans distributed in the spring and summer of 2020. As recently as December 2020, the IRS held the position that funds used to cover business expenses during the covered period would not be deductible if the expenses were forgiven (or were likely to be forgiven). Essentially, this would mean that these funds would be taxed as ordinary revenue. Given that, businesses would need to prepare themselves for a significantly higher 2020 tax bill and would need to readjust their forecasted cash flow positions.

But here is the great news: The latest COVID-19 bill declares that the expenses paid with the proceeds of a forgiven PPP loan are deductible, overruling IRS Notice 2020-32. The new act further declares that “no tax benefit shall be denied, and no loss carryovers or basis adjustment will be required as a result of the tax-free forgiveness of a PPP loan. This will prevent the IRS from taking the position that a company must reduce loss carryovers or the basis of its assets by the amount of the forgiven loan.”¹

“But here is the great news: The latest COVID-19 bill declares that the expenses paid with the proceeds of a forgiven PPP loan are deductible, overruling IRS Notice 2020-32.”

At the time of this writing, the IRS is publishing its own guidance on these issues (and others), but the benefit is undeniable — pharmacies that received a PPP loan in 2020 will be the beneficiaries of an unprecedented economic benefit: tax-free revenue. This is welcome news for your pharmacy’s cash position as we transition out of 2020 and step into 2021 with a little more certainty.

Is there another round of PPP loans in 2021?

The December 2020 COVID-19 relief bill also includes $284 billion for a second round of PPP funds. Even if your business received funds during 2020, you may be eligible for this next round of forgivable loans. Unfortunately, the eligibility requirements for this round of loans are more restrictive than the PPP loans offered in 2020.

“Even if your business received funds during 2020, you may be eligible for this next round of forgivable loans.”

Who is eligible for a PPP loan in 2021?

In the spring and summer of 2020, businesses only needed to claim they had reasonable suspicion that revenues would be negatively affected in the coming months. Of course, there was no way to accurately predict what might happen. In retrospect, many pharmacies finished the year with similar revenues to 2019, if not better. Regardless, asking for PPP funds in 2020 was an appropriate thing to do given the uncertainties at the time.

However, regarding 2021 PPP funding, businesses must demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same quarter in 2019. We in PCCA’s Compounding Pharmacy Management Services (CPMS) encourage our clients (and all pharmacies) to immediately consult with your accounting partners and compile your quarterly statements for 2019 and 2020 to help with this requirement.

Additionally, in 2021, businesses cannot have more than 300 employees in order to qualify for a PPP loan (as opposed to 500 employees in 2020). Businesses must also have used the full amount of their first PPP loan. This would likely not be a concern for pharmacies as far as we can tell.

How much can a business get from a PPP loan in 2021?

If eligible, PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the one year prior to the loan or the prior calendar year. The maximum loan is capped at $2 million. The same calculation was used to determine loan amounts in 2020.

“If eligible, PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the one year prior to the loan or the prior calendar year.” 

What expenses are eligible for PPP loan forgiveness in 2021?

The scope of forgivable expenses in 2021 is expanded compared to the original 2020 loans. In addition to the 2020 covered expenses (payroll costs, mortgage, rent and utilities), 2021 eligible expenses include:

• Payment for any software, cloud computing, human resources and accounting needs
• Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance
• Expenditures to a supplier pursuant to a contract, purchase order or order for goods in effect prior to taking out the loan that were essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan
• Personal protective equipment and facility adaptive measures put in place to comply with federal health and safety guidelines or any equivalent state and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration

Please note that borrowers are still required to use at least 60% of PPP loan proceeds on eligible payroll costs in order to receive full forgiveness .

What is the covered period for PPP loans in 2021?

The 2021 PPP updates give borrowers the option to choose between an eight-week covered period and a 24-week covered period. This will allow some flexibility for pharmacies to make the most strategic use of payroll versus other covered expenses. I encourage our CPMS clients to consult with your CPMS coach and accounting team to determine what route is best for you.

More information will undoubtedly be forthcoming about the 2021 updates to the PPP, including when applications will be accepted. PCCA will continue to lead, providing further guidance when that information is available. In the meantime, we in CPMS encourage everyone to speak with their accountants and financial institutions as soon as possible. As was the case in 2020, there is no guarantee that additional funding will be granted once the $284 billion allotment for loans has been exhausted.

Bryan Prescott, PharmD, MBA, PCCA Director of Management Coaching Services, currently provides business coaching for compounding pharmacies, including financial analysis, marketing and human resources expertise. Before joining the staff of PCCA in 2012, he worked at Pharmcare in Pearland, Texas, for 10 years, where he was the PIC and operations manager for the long-term care department. He has been a featured speaker at many PCCA and A4M seminars focusing on pain, palliative care, wound, scar, ENT and marketing. Bryan obtained his Doctor of Pharmacy from the University of Houston in 2001 and Master of Business Administration from Texas A&M University in 2019. He is a member of the Rho Chi Society and a lifetime member of Phi Delta Chi.

Reference

1. Jones, B. A., Kirsner, M. A., Mangas, R., Fornaris, C. A., Grimaldi, B. X., & Musyl, M. J. (2021, January 4). Paycheck Protection Program — Expected impact of “second draw” loans . Greenberg Traurig. https://www.gtlaw.com/en/insights/2021/1/paycheck-protection-program-expected-impact-of-second-draw-loans