The Consolidated Appropriations Act, 2021 (“the Act”) has been signed into law by President Trump as of December 27, 2020. This long-awaited legislation followed weeks of negotiations amongst lawmakers. This bill is structured to provide some much-needed aid to small businesses impacted most by the COVID-19 pandemic.
The Act includes several modifications and additions to the Paycheck Protection Program (PPP). Below is a summary of the key provisions of the Act specific to the PPP. Additional guidance and clarifications are expected from the SBA following the passage of the bill.
Deductibility of Paycheck Protection Program Expenses
One of the most widely-discussed aspects of the PPP process in recent months related to potential tax implication of loan forgiveness, specifically with regards to the deductibility of expenses PPP borrowers paid out of PPP funds that had already been, or were expected to be, partially or fully forgiven. The Act addressed this issue and explicitly clarified the original intent of Congress to provide that PPP-funded expenses of borrowers are fully deductible for federal income tax purposes, whether or not the PPP loan is or will be forgiven. The Act further clarifies that these deductibility provisions apply both to initial PPP loans funded earlier in 2020, as well as PPP Second Draw Loans authorized under the Act that are discussed further below.
Modifications to the Paycheck Protection Program
Additional expenses now eligible as allowable costs with PPP loans, which are in effect as if included in the original CARES Act. Loans that have already been through the PPP forgiveness process are excluded from these modified terms.
- Covered operations expenditures such as payment for any computing 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 and tracking of supplies, inventory, records or expenses
- Covered property damage costs including costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation
- Covered supplier costs including expenditures made by the entity to a supplier of goods pursuant to a contract, order, or purchase order for the supply of goods that are essential to the operation of the entity at the time at which the expenditure is made
- Covered worker protection expenditures including an operating or capital expenditure that is required to facilitate the adaptation of the business activities to comply with requirements established by governmental agencies, such as personal protective equipment and the purchase, maintenance, and renovation of assets (excluding residential real property or intangible property)
- Payroll costs now include not only employer paid health, dental, and vision costs, but group life and disability as well
Simplified application process for PPP loans up to $150,000, including loans that were obtained under the original CARES Act provisions:
- Eligible borrowers will be required to complete a 1-page forgiveness application to be established by the SBA
- Limited information will need to be provided to the SBA including number of employees retained as a result of obtaining the loan, the estimated amount of the loan spent on payroll costs, and loan value
- Various certifications to be made by the borrower attesting to compliance with the program’s requirements
- Supporting documentation is required to be maintained for up to 4 years
- Lenders may still request certain information to be provided by the borrower
PPP loan recipients that have returned all or part of their PPP loan, or did not accept the full amount for which they were eligible, may reapply for an additional amount allowed under the program.
In addition, any PPP borrower that also received an Economic Injury Disaster Loan (EIDL) grant amount from the SBA will no longer have their EIDL grant amount subtracted from the maximum loan forgiveness amount, and this repeal is effective for PPP borrowers regardless of whether or not they have completed the PPP forgiveness process prior to the effective date of the Act.
The SBA will be required to prepare an audit plan and submit this plan to Congress. All PPP loans will be subject to an audit by the SBA.
PPP Second Draw Loans
Certain entities are eligible to receive PPP second draw loans subject to more restrictive criteria than the original CARES Act provisions for PPP loans. The following is a summary of the provisions under PPP second draw loans:
- Loan terms and provisions will be the same as the CARES Act provisions, with a 5 year term and 1% interest
- PPP second draw loans are available through March 31, 2021
- Entities are eligible if they have no more than 300 employees and have experienced at least a 25% decline in gross receipts in any quarter during 2020 compared to the same quarter in 2019
- Additional provisions are included in the Act for borrowers that were not in business for all of 2019, but were in business as of February 15, 2020
- For businesses with more than one physical location with an NAICS code beginning with 72, the 300-employee limit is per location
- The 72 NAICS code designation includes Accommodation and Food Services businesses, such as hotels, food service contractors, bars, and restaurants
- Public companies are not eligible
- Certain business types are not eligible, such as entities involved with illegal activities and businesses primarily engaged in political or lobbying activities, or entities with at least 20% ownership by an entity in China or Hong Kong, or entities with a member of the board of directors that is a China resident
- Affiliation rules are waived with respect to eligibility under the same circumstances as the original CARES Act provisions
- Entities that receive a Shuttered Venue Operator Grant are not eligible
- The PPP second draw loan amount is 2.5 times the average monthly payroll costs, using either the calendar year 2019 or the 1-year period prior to applying for the loan, capped at a maximum loan amount of $2,000,000
- Seasonal employers have the option to use average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020
- Additional provisions are included in the Act for applicants that did not exist as of February 15, 2019, which would entail computing the average monthly payroll costs during the time period in which the borrower was in operations
- Entities with an NAICS code beginning with 72 are eligible for an amount up to 3.5 times the average monthly payroll costs
- Additional eligibility provisions are included in the Act for farmers and ranchers, housing cooperatives, news organizations, and 501(c)(6) organizations
- Similar to PPP loans obtained under the original CARES Act provisions, the amount forgiven must consist of at least 60% of payroll costs
- PPP second draw borrowers may elect an 8-week or 24-week covered period
Your professional service team at Miller, Cooper & Co., Ltd. is here to help you understand and navigate the ever-changing landscape of the PPP. Please contact a member of your service team for additional guidance and assistance.