December 28, 2020
Second Wave of PPP Loans: New Rules Take Effect Immediately
Posted by COVID-19 Rapid Response Team
On December 27, 2020, the President signed into law a sweeping stimulus program that included authorization for a second round of Paycheck Protection Program (PPP) loans for business owners deeply impacted by COVID-19.
In addition, it greatly expands the universe of eligible expenses for forgiveness of both new and existing PPP loans, and simplifies the forgiveness application process for loans under $150,000.
Most significantly for many borrowers, the law overrules the IRS and restores the tax deductibility of expenses used for PPP loan forgiveness.
Key Features for Existing PPP Loans
“Existing PPP loans” refer to those disbursed between April 3, 2020 and August 6, 2020.
Additional Eligible Expenses
Forgiveness previously has been predicated on expenses incurred or paid for payroll costs, mortgage interest, rent or lease costs and utilities. For any borrower who has not yet filed a forgiveness application, they may now include:
- Covered operations expenditures – which include business software or cloud computing service, 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 supplier costs – payments made to a supplier under a contract or purchase order for goods that are “essential to the operations of the entity” (leaving the definition of “essential” to the borrower). Note that the contract or purchase order must have been in place prior to the covered period of the existing PPP loan unless it was for perishable goods, which could be in place at any time.
- Covered worker protection expenditures – any operating or capital cost incurred to comply with safety or sanitation requirements put in place between March 1, 2020 and the end of the national emergency (once declared). Such costs can include establishment of a drive-through window facility, new ventilation or filtration systems, physical barriers, expanded space or other assets relating to compliance with government requirements.
- Covered property damage costs – for costs related to civil disturbances during 2020 that were not covered by insurance.
- Payroll expenses – now expanded to include employer payments for group life, disability, vision or dental insurance, which were previously excluded.
In short, there are many more business expenses that may be used for forgiveness support with these new, expanded eligible expenses.
Simplified Forgiveness Application for Loans up to $150,000
In October, the SBA released Form 3508S for borrowers with loans under $50,000, which greatly simplified the process of applying for forgiveness, essentially requiring only a few certifications by the borrower that the loan was put to proper use.
With this new law, this simple forgiveness process has been expanded to any loan under $150,000. By January 20, 2021, the Small Business Administration (SBA) is required to publish a new forgiveness form to be used by any borrower who has not yet filed for forgiveness, and who has a loan up to $150,000. This simple form will require the borrower to provide:
- The number of employees retained by use of the loan
- The estimated amount of the loan used for payroll costs (note: the 60% rule remains in place)
- The total loan amount
- An attestation that the loan was used in compliance with the law
While the documentation required upon submission of the forgiveness application has been simplified, borrowers should note documentation must be maintained by the borrower to support the forgiveness application for 3 years (non-payroll costs) or 4 years (payroll costs only) in the event of a subsequent audit.
In addition, the law expressly prohibits lenders from requiring any documentation to be submitted by the borrower beyond the items above.
Clarification of Tax Treatment of Forgiveness
The original Coronavirus Aid, Relief, and Economic Security (CARES) Act clearly exempted forgiven amounts from being included in gross income but left unaddressed anything to do with the deductibility of the expenses used for forgiveness. In this vacuum, the IRS issued guidance this fall that such expenses could not be deducted, nor could they be pushed into 2021 if no forgiveness application had yet been submitted.
Section 276 of the new law tackles that issue head-on, stating that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” of the forgiveness amount. Going one step further, partnerships and S corporations may treat forgiven amounts as tax exempt income and any increase in the adjusted basis of a partner’s interest in a partnership under section 705 of the Internal Revenue Code “shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.”
Borrowers are advised to get year-end tax advice regarding the impact of this forgiveness on both 2020 and 2021 tax years.
Key Features for New PPP Loans
“New PPP loans” refer to those disbursed between December 28, 2020 and March 31, 2021.
Whereas the original program allowed any business up to 500 employees with “economic uncertainty” to apply for an existing PPP loan, the new law limits eligibility substantially. For new PPP loans, an entity must have:
- 300 or fewer employees
- Experienced at least a 25% reduction in gross receipts (defined for nonprofits, but further guidance forthcoming for other organizations) in any 2020 quarter as compared to the same quarter in 2019 (subject to other considerations if the entity was not in business during some or all of 2019)
- Not been primarily engaged in political or lobbying activities
- Not have been organized in, be at least 20% owned by an entity domiciled in, or have a member of its Board of Directors who is a resident of China or Hong Kong
- Not be publicly traded
Maximum Loan Amount
All new PPP loans are limited to a maximum amount of $2 million. The basis for calculating the PPP loan amount is 2.5 times the average monthly payroll costs incurred or paid during 2019 or the 12 months prior to the loan date. There are some clarifications around seasonal employers that have been badly needed, as well as guidance for new entities that did not exist in 2019.
For the accommodations and food service industry (NAICS 72), the multiple is 3.5 times instead of 2.5 times.
Simplified Loan Application Process for Loans up to $150,000
Entities requesting smaller loans will not be required to submit documentation supporting the decline in gross receipts. Rather, they will simply need to submit a certification attesting to the revenue loss to qualify. However, it is important to note that documentation to substantiate the revenue loss will be required to be submitted to the lender at or before the time of filing for forgiveness.
Other Significant Changes
Additional changes from the Consolidated Appropriations Act of 2021 include:
- The EIDL Advance amount will no longer be deducted from PPP Forgiven loan amounts.
- PPP Borrowers are now eligible for Employee Retention Credits, providing the same wages are not used to calculate both the credit and forgiven loan amounts.
- The covered period for all borrowers, including existing PPP loan borrowers, has been extended until March 31, 2021.
- Expansion of eligible nonprofits to include certain 501(c)(6) and destination marketing organizations.
More Details to Come
There are many important aspects of the new law that businesses need to understand including payroll tax deferrals, Employee Retention Credit changes and more. Armanino will issue additional updates on these topics as details of the new law are processed.
These are unprecedented times. And we know you, your families and your organizations need support, now more than ever. Our top priority as your trusted advisor is to ensure we’re helping you through these tough times. Visit COVID-19 Rapid Response Resource Center for our crisis management resources and contact information for our COVID-19 Rapid Response Team Leaders.