December 27, President Trump signed the $900 billion COVID-19 relief bill into law, passed by Congress on December 21. The legislation, called The Consolidated Appropriations Act, 2021, provides over $300 billion in aid for small businesses and adds $300 to extended weekly unemployment benefits, among other provisions. It also reopens the Paycheck Protection Program with some important changes and ensures that expenses paid for with forgiven PPP loan funds will be tax-deductible.
Second Round of PPP Loans
A second round of PPP loans (PPP2) will be available for businesses with less than 300 employees (down from 500 employees in PPP1) who experienced a reduction of at least 25% of their revenue in the first, second, or third quarter of 2020. Businesses that previously received a PPP loan are eligible for PPP2 loans if they meet the above requirements.
The PPP2 legislation includes set-asides to support first and second time PPP borrowers with ten or fewer employees, first-time borrowers that have recently been made eligible, and for loans made by community lenders.
The PPP2 loan amounts are calculated using the average monthly payroll costs paid during 2019 or within the 12-month period before the origination of the PPP2 loan. In general, PPP2 loans will be equal to the average monthly payroll costs multiplied by 2.5, for a maximum loan amount of $2 million (down from $10 million from PPP1). Restaurants and Food Service businesses can qualify for loans equal to 3.5 times their average monthly payroll costs.
The bill provides flexibility on the spending of funds and a simplified loan forgiveness process for loans under $150,000.
The Small Business Administration (SBA) has ten days from the day the legislation is signed into law to establish regulations relating to PPP2 loans.
Requirements to Obtain a Second PPP Loan
PPP2 loans will be available to first time qualified borrowers and to businesses that previously received a PPP loan. Previous PPP recipients may apply for another loan of up to $2 million provided they:
- Have 300 or fewer employees
- Have used or will use the full amount of their first PPP loan
- Can show a 25% gross revenue decline in any 2020 quarter (except the 4th quarter, unless the loan application is after 12/31/2020) compared with the same quarter in 2019
Tax Treatment of PPP Loans
The COVID-19 related Tax Relief Act of 2020 (COVIDTRA), another subsection of the Consolidated Appropriations Act, clarifies that taxpayers whose PPP loans are forgiven are also allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan. The tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness, and no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness.
This provision is effective as of the date of enactment of the CARES Act, 3/27/2020, and provides similar treatment for PPP2 loans, effective for tax years ending after the date of enactment of the provision. As a result of PPP1 or PPP2 loan forgiveness, no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied.
In the case of an eligible recipient that is a partnership or S Corporation, any amount excluded from income is treated as tax-exempt income for purposes of Sections 705 and 1366 (basis provisions for partnerships and S Corporations, respectively).
Any increase in the adjusted basis of a partner’s interest in a partnership under Section 705 shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.
A $10,000 SBA Economic Injury Disaster Loan (EIDL) grant was an emergency grant from the SBA designed to provide small businesses with working capital to pay expenses like payroll costs, mortgage payments, and more, while their EIDL loan was considered.
The EIDL emergency Grant, which does not need to be repaid, is no longer available.
The new legislation repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
Additional Eligible Nonpayroll Uses of PPP Loan Proceeds
Before the Consolidated Appropriations Act, non-compensatory eligible nonpayroll costs included interest on mortgage obligations, rent, business interest, and utilities.
Along with these costs, the new legislation added the following costs as eligible for loan forgiveness:
Covered Operations Expenditures: A payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
Covered Property Damage Cost: A cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
Covered Supplier Cost: An expenditure to a supplier of goods that are essential to the operations of the entity at the time in which the expenditure was made and is made pursuant to a contract or order in effect at any time before the covered period or, with respect to perishable goods, in effect at any time during the covered period.
Covered Worker Protection Expenditure: An operating or capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established by government agencies for health reasons. These expenditures may include the purchase, maintenance, or renovation of assets that create or expand:
- A drive-through facility
- An indoor, outdoor, or combined air or air pressure ventilation or filtration system
- A physical barrier such as a sneeze guard
- An expansion of additional indoor, outdoor, or combined business space
- An onsite or offsite health screening capability
The term covered period means the time in which a borrower must use the funds to qualify for forgiveness. This was originally an 8-week period, but in subsequent amendments was extended to 24 weeks.
The Consolidated Appropriations Act gives welcome clarification for those needing more than eight weeks but not a full 24 weeks to use the PPP loan proceeds. The New Act allows borrowers to select the end date of their covered period. However, it must be greater than eight weeks from the date of disbursement of the PPP loan and not more than 24 weeks.
This subtle change will allow borrowers more control over how to handle potential reductions in the workforce once the PPP funds are exhausted.
Simplified Forgiveness Application for Covered Loans up to $150,000
A borrower will receive forgiveness if they sign and submit to the lender a certification that is not more than one page in length for PPP loans that are $150,000 and under. This form lists the loan amount, the number of employees retained, and the amount of the loan spent on payroll.
Eligibility for Section 501c(6) Not for Profit Organizations
For the first time, Section 501c(6) not for profit organizations will be eligible to apply for and receive PPP loans. These organizations generally consist of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues, which are not organized for profit and no part of the net earnings of which benefits any private shareholder or individual.
Contact Us for More Information
If you need assistance filling out your PPP loan forgiveness application form, would like us to review your application, or have any other questions or concerns, we’re here to help. Please email [email protected] or call 443-320-4101.