On December 27th, President Trump signed into law the long-awaited Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“Act”) that includes: a second round of the Paycheck Protection Program loans (PPP), extensions on previously expiring provisions, expansions of eligible PPP expenses, deductibility of certain PPP related expenses, along with simplifying the forgiveness process for PPP forgiveness applications that are $150,000 or less, and much more.
Below are some of the key provisions impacting PPP loans issued prior to the Act, or new PPP loans issued after the Act.
Deductibility of PPP related expenses
While the Cares ACT excluded PPP loan forgiveness from gross income, it did not specifically address if related expenses could be deducted. In April of 2020, the IRS issued a notice stating that PPP recipients could not claim any deductions for expenses funded from forgiven PPP loans, which, in essence made the PPP funds taxable. This caused a lot of questions and concerns from companies and tax preparers alike and was not in line with Congress’s original intent The ACT solved this issue by making these expenses deductible even if they were used to obtain PPP loan forgiveness. The bill states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied by reason of exclusion from gross income.”
Expansion of eligible PPP expenses
Just as before, costs eligible for loan forgiveness include payroll, rent, covered mortgage interest, and utilities, where 60% of the total amount must be incurred on payroll to achieve forgiveness without reduction. The Act adds additional costs which are eligible for forgiveness for both new and existing PPP loans, but does not apply to those PPP loans that have already been forgiven. Additional eligible costs include the following:
- Covered operations expenditures – includes costs such as business software or cloud computing expenses for business operations, product or service delivery, payroll processing, payment, or tracking, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
- Covered property damage costs – includes costs related to damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
- Covered supplier costs – includes payments for the supply of goods that are essential to the operations of the business when the payment is made, and are made pursuant to a contract, order or purchase order that was in effect prior to the covered period. If the goods are perishable, the contract, order or PO can be in effect prior to or at any time during the covered period.
- Covered worker protection expenditures – includes operating or capital expenditures to facilitate the adaptation of the business, to comply with COVID-19 federal health and safety guidelines.
The Act also clarified that group insurance payments include health, group life, disability, vision, and dental insurance.
Simplified PPP forgiveness process for loans $150,000 or less
The Act simplified and streamlined the process for borrowers who obtained loans of $150,000 or less in PPP funds. The Act provides for automatic forgiveness if the borrower does the following:
- Sign and submit to the lender a certification that the borrower complied with the PPP requirements. The certification should not be more than one page in length, it should include a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
- Retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud. This is a reduction in the document retention time that is required for larger loans.
To affect this new process, the SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements.
EIDL advances no longer reduce PPP forgiveness
The Act repealed the requirement that borrowers deduct the amount of EIDL advances they received from the PPP forgiveness amount.
New PPP Loans
The Act created “PPP Second draw” forgivable loans for the harder-hit small businesses. The Act allows more categories of borrowers who were previously not eligible for PPP loans, including: housing cooperatives, local chambers of commerce, and certain news stations, though some additional eligibility restrictions may apply for some of these entities. Additionally, the Act clarified that churches and religious organizations are eligible borrowers. The loans are to be made available from the date of the enactment of the law through March 31, 2021.
The Act places stricter limits on eligibility for the second draw loans. Businesses will be eligible for a PPP Second Draw loan of no more than $2 million if they meet the following conditions (there are some exceptions, including if the business did not apply in the first round, in which case, the cap remains at $10 million):
- Have 300 or fewer employees.
- Demonstrate at least a 25% reduction in gross receipts in any quarter in 2020 compared to the same quarter in 2019, or if the entity was not in business in 2019, a 25% reduction in gross income in the second, third, or fourth quarter of 2020 compared to the first quarter in 2020.
- Have used or will use the full amount of the first round of PPP funding.
- Businesses are excluded from obtaining the PPP Second draw if they are created in or organized under the laws of China or Hong Kong, or have significant operations in China or Hong Kong, or those that are at least 20% owned by an entity or a board member that resides in China or Hong Kong.
As with the first round of PPP loans, borrowers are still required to certify that the current economic uncertainty makes the loan request necessary to support ongoing operations.
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. For the accommodations (think hotels) and food service businesses (NAICS 72), the multiple is increased to 3.5 times instead of 2.5 times.
Need more information?
There are many nuances to the new rules and getting up to speed can be a significant time investment. Be sure to discuss the specifics with your CPA and bank/lender to ensure you understand how the Act will affect you.
As always, Shannon & Associates is here the help! Please reach out if you have any questions. Happy New Year!
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