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.
Eligibility for Second-Time Borrowers
Borrowers who previously received a PPP loan may apply for a second loan of up to $2 million if the meet the following criteria:
- Have fewer than 300 employees
- Experienced at least a 25% reduction in gross receipts during 2020 quarter compared to the same quarter in 2019
- For businesses that were not open all of 2019, or opened before 2/15/2020, there are different tests for comparing gross receipts
- Have used or will use the full amount of their first PPP loan
How Much Can Second Time Borrowers Borrow?
PPP2 loans for second time borrowers are capped at $2 million (previously $10 million) and calculated using 2.5x their average monthly payroll for calendar year 2019 or a 1-year period immediately prior to applying.
Seasonal businesses (those who operate 7 months or less or earn 2/3% or more of their receipts in 6 months of the year) may use the average monthly payroll of any 12-week period between 2/15/2019 and 2/15/2020 to calculate their loan amount. New entities formed after 2/15/2020 may use the monthly average of their payroll paid so far.
Entities assigned an NAICS code beginning with 72, such as restaurants and hotels, may apply for 3.5x their average monthly payroll. For these businesses, the 300-employee limit is determined by location rather than company-wide.
PPP Loan Eligibility for First-Time Borrowers
The maximum loan amount for first time PPP loan borrowers is $10 million, like in the first round, and businesses must have 500 or fewer employees to be eligible.
If a company returned all or part of original loan, or did not take 100% of original maximum, and has not yet applied for forgiveness, the company can apply for maximum amount or the difference between its maximum and what it received, up to a total of $10 million.
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 PPP loan forgiveness:
Covered Operations Expenditures: A payment for any business software or cloud computing service
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 Costs: Expenditures made by a borrower to a supplier of goods for the supply of goods that both:
- Are essential to the operations of the borrower at the time at which the expenditure is made; and
- Is made pursuant to a contract, order, or purchase order
- In effect at any time before the covered period with respect to the applicable covered loan; or
- With respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan
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
Tax Treatment of PPP Loan Funds
Borrowers may deduct PPP expenses paid for with PPP funds, effective as of the date of enactment of the CARES Act, 3/27/2020.
In the case of 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.
The new legislation also repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
Important: Loan forgiveness is not tax-exempt income until it is forgiven, but the expenses are deductible the year they are spent. This could create basis issues because of timing.
Additional PPP Changes
♦ Borrowers can select the length of their covered period, which must be between 8 and 24 weeks from the date of their loan’s disbursement
♦ You can now receive both an Employee Retention Tax Credit and a PPP Loan, however you cannot use the same wages for both
♦ Economic Injury Disaster Loans (EIDL) – If you didn’t get full $10k first time, you can get rest now
♦ Advance is tax-exempt income (similar to the PPP)
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]ancpas.com or call 443-320-4101.
Author: Megan O’Donnell