Much of the publicity and scrutiny surrounding the recently enacted coronavirus relief bill attached to the Consolidated Appropriations Act of 2021 has been focused on the economic impact payments and supplemental unemployment benefits provided to individuals, which you may read about here. But perhaps the more important aspect of the relief package is the allocation of an additional $325 billion in aid for a second round of business assistance loans under the Paycheck Protection Program (“PPP”). The act reopens the original PPP program for new applicants, permits businesses that previously received a loan in phase one of the PPP program to apply for a second PPP loan, and provides important revisions and clarification regarding the use of loan proceeds from both rounds.
Businesses eligible for a PPP loan in phase two:
Businesses that did not receive PPP loan proceeds from phase one – The act reopens the application period for businesses that did not receive a PPP loan in phase one. The qualifications and rules to obtain a loan in the second round remain largely the same for these businesses.
New eligible organizations – The act adds eligibility for housing cooperatives, destination marketing organizations, some 501(c)(6) organizations and certain individual stations, newspapers, and public broadcasting organizations to apply for a loan. To be eligible, lobbying activities must comprise no more than 15 percent of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to February 15, 2020.
Businesses that returned PPP loan proceeds from phase one – Businesses that received PPP loan proceeds in phase one that gave back some or all of their loan proceeds are now allowed to reapply for the maximum allowable loan amount. This will help businesses that returned funds due to uncertainty regarding their qualification.
Businesses that received PPP loan proceeds from phase one – Businesses that previously received and spent their loan proceeds from the first round may now apply for a second loan. To qualify:
1. The business must have no more than 300 employees (down from the 500-employee threshold in the first round).
2. The business must have experienced a drop in revenue of more than 25 percent in any one quarter in 2020, as compared to the same quarter in 2019. Special rules apply to businesses that were in operation by February 15, 2020, but did not exist for all, or some portion, of 2019.
Businesses should carefully examine the qualification period to determine if the 25 percent threshold can be met. There may have been at least one quarter where revenues suffered enough that they would qualify, notwithstanding the overall health of the business in 2020.
Maximum allowable PPP loan amount in phase two:
Businesses applying for a second PPP loan generally are eligible to receive an amount equal to 2.5 times their 2019 average monthly payroll costs up to $2 million (with a small exception for businesses engaged in “Accommodation and Food Services”). The $10 million maximum will still apply to first-time applicants.
Important additions regarding eligible expenses:
An important addition is the inclusion of four new categories of expenses for which loan proceeds can be used:
1. Business software or cloud computing services 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.
2. Expenses related to property damage and vandalism or looting due to public disturbances that occurred during 2020 and was not covered by insurance or other compensation.
3. Expenses involving payments to a supplier of essential goods 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 at any time during the covered period with respect to perishable goods).
4. Operating or capital expenditures related to complying with requirements established or guidance issued by the DHHS, CDC, or OSHA, or any equivalent requirements established or guidance issued by a state or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
It is important to note that the foregoing eligible expenses apply to both loan proceeds received in the first and second round. Funds spent on any of these four expenses will be eligible for forgiveness, subject to the percentage limitations for non-payroll expenses.
Important clarification regarding the characterization of eligible expenses:
The act clarifies that expenses related to group life insurance, group disability, vision, and/or group dental insurance are all considered payroll expenses.
Most important, the act clarifies that eligible expenses paid with forgiven PPP loan proceeds are also tax deductible. This additional clarification should be a welcome relief to businesses. Despite the statutory language in the original law, the IRS had adopted the position that, while the forgiveness of loan proceeds would not be taxable, any otherwise deductible expenses paid with forgiven loan proceeds cannot be claimed as a deductible expense. This loss of otherwise deductible expenses had the potential of creating an artificially inflated tax bill for businesses in 2020. The act now explicitly authorizes deductions to be taken for such eligible expenses paid with forgiven PPP loan proceeds. This treatment of loan proceeds applies to any proceeds from new loans and to expenses already paid with original PPP loans that were forgiven.
Flexibility to select the covered period for all applicants:
Previously, businesses that had their PPP loan funded before June 5, 2020 were permitted to choose between either an eight-week or a 24-week covered period during which expenses that were “incurred” or for which there were “payments made” would be used to determine how much of the PPP loan was forgivable. Now, businesses that had their PPP loan funded on or after June 5, 2020 (including new applicants in phase two), will also be able to choose between an eight-week or a 24-week covered period.
Changes to seeking forgiveness of PPP loans:
Two new provisions will simplify the process for businesses seeking forgiveness on a PPP loan that is less than $150,000. While businesses are still obligated to follow all applicable PPP rules, the act specifically prohibits lenders from requesting any substantiating documents when the business submits their forgiveness certification. The act also requires the SBA to create a new forgiveness certification that is no longer than one page.
What should be on every applicant’s to-do list:
Businesses that did not expect to receive full forgiveness of their loan proceeds from phase one should reexamine their calculations based on the new expenses identified in the act. It is important to note that businesses that have already applied for forgiveness and received a decision cannot “reapply” for forgiveness.
Businesses should revisit their tax planning strategy in light of the clarification that eligible expenses paid with forgiven PPP loan proceeds are tax deductible.
All businesses (even those seeking forgiveness for loans less than $150,000) should compile any documents to prove their losses and the necessity for a loan. This includes retaining employment and payroll records relevant to the application for at least four years and retaining other documentation for at least three years.
Disclaimer: Laws, regulations, and guidance on matters related to COVID-19 change rapidly. Please contact your Payne & Fears attorney for current guidance.