Months of negotiations concluded December 20 when the U.S. House and Senate agreed to a significant COVID-19 stimulus package - as part of a broader spending package.
Then on December 21, 2020, Congress passed the Coronavirus Response and Relief Supplemental Appropriations Act, as part of the Consolidated Appropriations Act of 2021. The most important business relief provisions come from a subsection of the Continuing the Paycheck Protection Program Act.
This new small business relief includes:
- Deductibility of expenses paid for with PPP loan funds (and EIDL grants) - Despite members of Congress expressly telling the Internal Revenue Service (“IRS”) from the time the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020 that it was their intent that expenses funded with Paycheck Protection Program (“PPP”) loan proceeds should be deductible for tax purposes, the Service still promulgated guidance saying they were not.
The Act now clarifies that such expenses are deductible, the amount of loan forgiveness is not taxable, and neither has any effect on tax basis. The Act goes on to provide that EIDL grants are not taxable income and expenses paid with grant funds are fully deductible.
The Act provides for a second round of PPP loans as well as a way for borrowers to increase the amount of their original loans.
Some Features of the Act associated with original loans:
- Increasing round one loans:
- In the early days of the PPP loans, the SBA was releasing guidance as quickly as possible.
- Borrowers were trying to get loan applications completed before the allocated funds were exhausted.
- Some borrowers could have borrowed more based on later issued guidance but were prevented from doing so because of the “one loan” rule.
- The Act allows affected borrowers to now go back to their lenders and increase their loans based on subsequently released guidance.
- Borrowers who returned their original loans.
- The SBA has 17 days after passage of the Act to provide guidance.
- Eligible borrowers who returned all or part of their original loans may reapply for the difference.
- Eligible borrowers who didn’t accept the full amount of the loan may apply to increase the loan to the maximum amount allowed.
While many borrowers could have taken larger loans, this is a considerable benefit for partnerships and certain sole proprietors who borrowed early in the first round of PPP loans. At the time, it appeared that they could borrow based only on the wages they paid to employees and not include an equivalent amount of partner compensation or self-employment income. Once the SBA released guidance clarifying this situation, it was too late for them to go back to their lenders and increase the loan size. This provision cures the inequity.
Key elements of the Act associated with the second round of PPP loans:
- $267.5 billion allocated – some from funds left over from the April 2020 PPP funding.
- $25 billion is reserved for businesses with 10 or fewer employees as of February 15, 2020.
- Eligible businesses may apply for a SECOND PPP loan.
- To apply for these loans, a business must have less than 300 employees AND have experienced a 25% decline in gross receipts in any quarter of 2020 compared to the same quarter in 2019.
- Loan cannot exceed $2 million, and all loans to all affiliated borrowers from both the first and second round cannot exceed $10 million.
- Loan cap is 2.5 times the average monthly payroll for the twelve months through the date of application or the average monthly payroll for 2019.
- For accommodation and food service businesses (NAICS Code 72), the maximum loan is calculated at 3.5 times monthly payroll not to exceed $2 million.
- The covered period for new loans runs through March 31, 2021.
- Not-for-profit business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (so-called 501(c)(6) organizations) which were previously not eligible PPP loan borrowers may now apply if:
- They have 150 or fewer employees,
- Less than 10% of their gross receipts come from lobbying activities, and,
- Lobbying activities comprise less than 10% of their total activities.
- Housing cooperatives with not more than 300 employees may also apply.
While the Act doesn’t explicitly say so, it is likely that borrowers of second round PPP loans will have to make the same certification that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations.” This certification was required for first round PPP borrowers.
One criticism of the CARES Act was that it severely restricted the allowable uses of PPP loan funds. Many businesses were incurring unusual costs to ensure workplace safety – but these costs were ineligible expenses.
The Act rectifies that by adding the following to the list of acceptable loan expenditures:
- 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 costs.
- A cost related to property damage, vandalism and looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
- Covered supplier costs.
- An expenditure made by an entity to a supplier of goods pursuant to a contract, order, or purchase order in effect before the date of disbursement of the covered loan for the supply of goods that are essential to the operations at the time at which the expenditure is made.
- Covered worker protection expenditures.
- An operating or a capital expenditure that is required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020 and ending on the date on which the COVID-19 national emergency declaration expires.
- Payroll costs now include payments for group health care or other group insurance benefits, including insurance premiums.
- This includes group life, disability, vision or dental insurance.
The Act clarifies that the covered period of a PPP loan begins on the date the loan originated and ends on a date selected by the borrower that occurs during the period beginning on the date that is eight weeks after the origination date and ending on the date that is 24 weeks after the origination date.
This does not change the fact that to have the loan completely forgiven, at least 60% of loan proceeds must be spent on payroll and associated eligible costs.
The Act makes it easier for certain borrowers to obtain forgiveness of their PPP loans. These new rules apply to both original PPP loans as well as new loans under the ACT.
For loans less than $150,000:
- SBA has 24 days after the Act is passed to create a new one-page form.
- Borrower attests that it complied with all loan requirements and provides certain limited information.
- Loan is forgiven.
- Borrower still must retain records for three years (four years for employment records).
The Act also provides guidance to the SBA regarding how it may audit PPP loans. Within 45 days after the Act is passed, the Administrator must submit an audit plan to Congress detailing policies and procedures for auditing covered loans and the metrics to be used in determining which loans will be subjected to audit.
Finally, the Act repealed the requirement that PPP borrowers reduce their loan forgiveness amount by the amount of any EIDL grants.
Confusion still surrounds PPP loan forgiveness – and how borrowers qualify for the safe harbors relating to full-time equivalent employee counts and the effect on the amount of loan eligible for forgiveness. The Act does not provide any new guidance on safe harbor qualification or any of the other uncertainties surrounding the various PPP loan forgiveness safe harbors.
The Act also doesn’t directly address the PPP Loan Necessity Questionnaire (Form 3509) that the SBA released in November which banks are now requiring some borrowers with loans of $2 million or more to complete. It is possible that the audit language of the Act will require the SBA to reconsider the use of these forms.
Finally, guidance is not yet complete on how to handle PPP loans and loan forgiveness calculations subsequent to merger and acquisition transactions. Even though this problem is of more limited applicability, it would be nice if either Congress or the SBA would let affected borrowers know what they are supposed to do in these instances.
The SBA has 10 days from passage of the Act to issue regulations implementing the changes to the PPP loan program.
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Article contributed by David Peritz.