As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates #1, #2, #3, #4, #5, #6, #7,#8,#9,#10,#11,#12,#13, #14, #15, #16, #17, #18, #19
On December 27th, the long overdue second major economic relief package, delivering an expected $900 billion to individuals and businesses impacted by the coronavirus pandemic, was signed into law. Continuing with our never-ending PPP focused blog series, today we will focus on the changes and additions to the Paycheck Protection Program (PPP) that were included in this Consolidated Appropriations Act, 2021 (CAA 2021).
The entire text of the Consolidated Appropriations Act of 2021--all 5,593 pages--can be found here.
Paycheck Protection Program Changes:
Deductibility of Forgiven PPP Costs
On January 6, 2021, the IRS released Revenue Ruling 2021-02 that declares its previous Notice 2020-32 (discussed in our previous PPP update #18) superseded. Notice 2020-32 stated expenses paid with PPP loan proceeds expected to be forgiven were not deductible. However, CAA 2021 clarified Congress’ original intent and codified the deductibility of expenses paid with PPP loan proceeds expected to be forgiven in addition to the CARES Act provision that forgiven PPP loan proceeds are excluded from taxable income. This applies to all borrowers, old and new, regardless of the status of their forgiveness applications.
Before this change in the law, borrowers believed they were being penalized for applying for forgiveness because the non-deductibility of forgiven expenses would inflate their income and increase their tax liabilities due. Now borrowers can rest easy knowing there is no additional tax burden stemming from the PPP loan forgiveness.
New Eligible Non-Payroll Costs Allowed
The following costs were added to the list of eligible non-payroll costs, but forgiveness still requires the loan to be used at least 60% for payroll costs. These eligible costs apply to old and new PPP loans, unless the borrower already applied for forgiveness.
- Covered operations expenditures – business software or cloud computing that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll, human resources, sales & billing functions, or accounting or tacking of supplies, inventory, records, and expenses.
- Covered property damage costs – costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
- Covered supplier costs – Expenses made by the borrower to a supplier of goods for the supply of goods that were essential to borrower at the time of the expenditure and was contractually agreed upon before the covered period. Perishable goods contracts may also be in effect during anytime during the covered period.
- Covered worker protection – Expenditures required to comply with guidance established by DHHS, the CDC, OSHA, or equivalent state and local agencies put in place because of the pandemic. (i.e., sanitation, PPE, social distancing, etc.). This also includes air ventilation systems, renovations to expand a drive-through window(s), onsite or offsite health screening stations.
Borrowers will no doubt have specific questions whether their unique expenditures qualify. As SBA releases the new forgiveness forms, instructions, and guidance, we will provide more insight and greater detail on the interpretation of these costs.
Flexible Covered Period from 8 weeks to 24 weeks
You may recall, previous guidance stated that borrowers who applied for their PPP loan before June 5, 2020, had an option for an 8 or 24-week covered period beginning on the loan disbursement date. Borrowers who applied after that date had to use a 24-week covered period. Generally, eligible costs paid or incurred using PPP funds during this period are eligible for forgiveness (ignoring reduction calculations).
Borrowers required to use the 24-week period often exhausted their PPP funds prior to the completion of their covered period. Applying for forgiveness early was allowable, but all forgiveness calculations required computations using the 24-week period.
Borrowers now have the option to choose a desired covered period between 8 and 24 weeks. The covered period will still begin on the loan disbursement date.
Simplified Forgiveness for Loans under $150,000
CAA 2021 granted a highly anticipated simplified forgiveness process for loans under $150,000. It is important to note this is NOT automatic forgiveness. Qualified borrowers now only need to submit a one-page forgiveness application. The form will require the following information:
- A description of the number of employees the qualified borrower retained because of the covered loan
- The estimated amount of the loan proceeds spent by the borrower on payroll costs
- The total loan value
Qualified borrowers will be required to sign certifications that the funds were used for what the program intended. Borrowers applying with the simplified form will not be subject to reduction calculations. It seems submitting additional documentation to the bank is not required, but borrowers will be required to maintain support for 3 years (4 years for employment records). SBA reserves the right to review loan and forgiveness amounts. If the SBA later determines fraud was committed, they will have the right to modify loan and forgiveness amounts.
We will provide additional details when the SBA releases the new simplified forgiveness form, instructions, and related guidance.
EIDL Advance Does Not Reduce PPP Forgiveness
The EIDL no longer reduces the final forgiveness amount of the PPP Loan. Before CAA 2021, if a PPP borrower also received a EIDL advance, that advance would reduce the final forgiveness amount. This made it impossible to receive full forgiveness of PPP loans for those participating in both programs. This was redacted giving affected borrowers a chance to “double dip” in relief funding.
Request for Increases in Loan Amounts
Borrowers who received a PPP Loan and did not accept the full amount can request a modification to increase the amount of the covered loan to the maximum amount allowable. Additionally, going forward, if any Interim Final Rules are issued that would increase a borrowers’ loan amount, borrowers have the right to submit a request for a PPP loan increase.
Many borrowers who applied in the very beginning of the PPP saga, when the maximum loan calculation was unclear, applied for less funding than they could have received. Banks were unable to correct the amount of PPP loans after they filed a specific form with the SBA documenting a loan. It is unclear how the banks will respond since “allowing a request” does not guarantee acceptance.
Second Draw of PPP Funds for Certain Qualified Borrowers
CAA 2021 provides an additional round of PPP funding for new and previous borrowers.
WHO IS ELIGIBLE?
For-profit businesses, non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. These eligible recipients must meet these criteria:
- They were in operation on or prior to February 15, 2020; AND
- They have no more than 300 employees (for businesses with multiple locations, no more than 300 per physical location); AND
- Had a 25% or greater reduction in gross receipts during a specific quarter in 2020 compared to the same quarter in 2019 (alternative comparative options are available for businesses not active in most or all of 2019 but were active before February 15, 2020).
Certain entities are excluded, such as entities engaged in political or lobbying activities, including but not limited to, entities organized for research of public policy or political strategy. Also, an entity organized under the law of the People’s Republic of China & Hong Kong or has significant operations in this location and owns, directly or indirectly, twenty percent (20%) of the economic interest of the business.
Additionally, borrowers must make the same certification that was required in the first round of funding stating “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” A significant revenue decline during one quarter in 2020 may not necessarily paint the picture for their current financial position. Borrowers should consult with their advisors to determine if the new round of funding is right for them.
HOW MUCH CAN YOU APPLY FOR?
For most borrowers, the calculation will remain the same. This means, except for the $2 million cap discussed below, borrowers will receive the same amount of funding in Round 2 as they did in Round 1, assuming they did it correctly the first time (see discussion above regarding requests for increased loan amounts). In short, the maximum loan is 2.5x average 2019 monthly payroll costs limited to a max of $100,000 per employee unless a borrower qualifies for the special rules discussed below. You can reference our PPP Update #5 for a more-detailed look at the calculation.
A major difference from the first program is the maximum new loan allowed is $2 million, compared to the previous program’s $10 million limit. If a borrower requested a PPP Loan in the last 90 days, the aggregate of the new loan and the old cannot exceed $10 million.
Alternative Maximum Loan Calculations for Specific Borrowers
Seasonal Employers may calculate their maximum loan based on the average monthly payroll costs for any 12-week period between February 15, 2019, and February 15, 2020; however, the maximum loan of $2 million still applies.
Seasonal employers were redefined as:
- Borrowers that do not operate for over 7 months in any calendar year; OR
- During the preceding calendar year, had gross receipts for any 6 months that were not over 33.33% of the gross receipts of the employers for the other 6 months of that year.
Hospitality Employers (NAICS Code starting with 72) may calculate their maximum loan based on 3.5x the average monthly payroll costs during the one-year period before the date on which the loan was made or the calendar year 2019; however, the maximum loan of $2 million still applies.
Tax Warrior Perspective
Borrowers who believe they are qualified for the second draw of PPP should start collecting any information needed to apply and consult their tax advisors. This next round of funding, which re-opens on January 11, 2020, will be limited, and is first come, first served. We do not expect nearly as many applicants for the second round based on the limited scope to qualify, however borrowers who qualify and need this relief should not waste any time in preparing to apply. We suggest prospective borrowers analyze, confirm, and document that their business has experienced a decrease in revenue of 25% or greater in comparative quarters from 2019 to 2020.
Second Chance at First Draw of PPP Funds for Certain Qualified Borrowers
Those who did not (or could not) receive a PPP loan prior to the expiration of the first program, may now be eligible for PPP Funds.
WHO IS ELIGIBLE?
- General businesses, independent contractors, and self-employed individuals that have 500 or fewer employees (for hospitality and food service businesses with multiple locations, no more than 500 per physical location)
- 501(c)(3) non-profit organizations
- 501(c)(6) organizations (business leagues, state professional organization societies, chambers of commerce, etc.) and destination marketing organizations that have no more than 300 employees and whose lobbying activities do not comprise of more than 15% of total activities or 15% of gross receipts. Additionally, the cost of said lobbying activities cannot exceed $1M during the most recent tax year-end prior to February 15, 2020. In no case may PPP funds be used for lobbying activities.
Note all eligible borrowers are subject to the same certification that was required in the first round of funding stating “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
We expect new forms, technical corrections, and more guidance to be forthcoming. On Wednesday evening, January 6, 2021, SBA and Treasury released additional guidance, which we will cover in a subsequent update.
If you have questions about how to navigate the new provisions of the PPP program, please call on us. You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.