The Consolidated Appropriations Act, 2021 (CAA) that President Trump signed on December 27 includes several changes to the Paycheck Protection Program (PPP). The changes clarify the tax treatment of expenses funded with PPP loans, expand the program to businesses that didn’t borrow under the original PPP or that experienced financial hardship in 2020, and ease the loan forgiveness process.
Tax Deductibility
The CARES Act made loan forgiveness non-taxable under the original PPP rules. The IRS caused concern for most borrowers when it took the position that expenses funded with forgiven PPP loans should be non-deductible. Several Senators and Members of Congress said that the IRS’s position was contrary to Congress’s intent, and the CAA makes that explicit. Under the CAA, the IRS may not deny a deduction for an expense because it was funded by the PPP.
Second Round of PPP Loans
The hardest-hit businesses that borrowed under the original PPP may be able to apply for additional PPP funding under the CAA. To be eligible, a business must:
· Have 300 or fewer employees
· Have experienced a decline of at least 25% in gross receipts in any calendar quarter of 2020, compared to the same quarter of 2019
· Have used the full amount of its funds from its first PPP loan
A business receiving a second PPP loan may borrow 2.5 times its average monthly payroll cost, capped at $2 million. Because they have particularly suffered under shut-down rules, hospitality businesses, such as restaurants, bars, and hotels, may borrow up to 3.5 times their average monthly payroll. Loans for those businesses are still capped at $2 million.
The CAA gives the SBA 10 days to issue guidance on the second round of PPP loans, so businesses should expect to be able to apply sometime after January 7.
Extended Eligibility for First PPP Loans
The CAA allows businesses that didn’t receive funding under the initial PPP to apply under the initial rules. Those rules allow a business with 500 or fewer employees to apply. Significantly, the CAA makes organizations exempt under Sec. 501(c)(6), such as trade associations, eligible to apply for PPP loans.
Changes to Loan Forgiveness
Borrowers with loans less than $150,000 will be able to apply for forgiveness under a streamlined process. The SBA has 24 days to prepare the streamlined forgiveness form, but it should be a one-page form that allows the borrower to attest to compliance with PPP rules and that provides forgiveness without regard to decreases in the borrower’s staffing and payroll levels.
The original PPP rules based loan forgiveness on expenses paid or incurred during one of two covered periods – either eight or 24 weeks beginning on the date the loan funded. The CAA provides flexibility to borrowers by allowing them to use any period ending between eight and 24 weeks after the loan funded.
Finally, payroll cost must make up at least 60% of expenditures used for forgiveness. Other expenses eligible for forgiveness under the original PPP included mortgage interest, rent, and utilities. The CAA substantially expands the other expenses that may qualify for forgiveness by adding four additional categories, which are summarized in the table below. The expenses are still subject to the 60/40 split between payroll and other costs.
Changes to the PPP should provide significant benefits to businesses struggling with the continuing COVID-19 pandemic. Borrowers with loans under $150,000 would be wise to wait to apply for loan forgiveness until the rules of the streamlined application are final. Businesses that expect to apply for a second round of PPP financing should prepare to contact their lenders once the SBA releases its guidance. We will continue to monitor changes in the PPP and will update our analysis as new information becomes available. Please contact us if you have any questions.
Expanded Expense Categories
- Covered operations expenditures. Payments 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: 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 cost: An expenditure made by an entity to a supplier of goods that are:
- Essential to the operations of the entity at the time at which the expenditure is made, or
- Is made pursuant to a contract, order, or purchase order that was either 1) in effect at any time before the covered period with respect to the loan, or 2) with respect to perishable goods, in effect before or at any time during the period.
- Covered worker protection. These are operating or capital expenditures that are 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 CDC, or OSHA during the period beginning on March 1, 2020 and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires. Eligible costs are those related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. The term includes:
- The purchase, maintenance, or renovation of assets that create or expand a drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an indoor, outdoor, or combined commercial real property; an onsite or offsite health screening capability; or other assets relating to the compliance with the requirements of certain protective guidance.
- The purchase of covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor.
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
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