Very late on Monday night, December 21, both the House of Representatives and Senate passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, and is awaiting signature by the President of the United States. This legislation provides for:
Tax deductibility of PPP expenses
Paycheck Protection Program (PPP) 2.0
Borrower-favorable modifications to existing PPP loans
Refunding of EIDL Advance program
Extension to payback of deferred payroll taxes claimed under President Trump’s executive order
$600 direct payment checks per adult and child, if below $75,000 ($150,000 MFJ) income threshold
$300 per week enhance unemployment insurance benefit
100% meals tax deduction as long as the expense is for food or beverages provided by a restaurant
Effective for calendar years 2021 and 2022
Please click this link or visit our website for a detailed explanation of the major stimulus provisions for businesses as part of this legislation.
Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Act”)
On Monday night, December 21, Congress passed additional personal and business relief measures tacked onto the federal government’s fiscal spending bill, paving the way for a second round of Paycheck Protection loans (PPP2) and modifications to the original Paycheck Protection loan program (PPP1) that was enacted in March as part of the CARES Act.
Below is a summary of the key provisions of the stimulus portion of the Act (which is over 5,000 pages).
PPP1 and PPP2 Tax Deductibility
The Act clarifies that payments made on SBA loans by the SBA under CARES Act §1102 are both:
Not taxable income to the borrower when loan forgiveness is received, AND
Allows for 100% deduction for any expenses paid with loan proceeds, overriding the IRS’ previous guidance we outlined last month. In addition, the borrower is not required to reduce basis in any asset obtained with loan funds. For example, if a borrower utilized PPP proceeds to erect safety barriers for their employees, which were significant enough to warrant capitalization, the borrower would continue to have a right to the depreciation on such capitalization even though it was paid for by PPP loan proceeds.
Broad PPP1 and PPP2 Changes
The law provides that both the PPP1 and PPP2 loans will be funded through March 31, 2021
PPP borrowers, who also received an EIDL advance, will no longer be required to reduce the PPP forgiveness by the amount of the EIDL advance.
PPP1 funds are still available. However, the maximum loan under this “second chance” PPP1 loan program is reduced from $10 million to $2 million
This reduction in the maximum amount only applies to a PPP1 loan applied for after the date of enactment of the Act
The Act also allows a borrower to apply for an increased loan amount if an Interim Final Rule issued by the SBA qualified the borrower for a larger loan amount, even if:
The initial PPP1 loan amount has been fully disbursed, or the lender of the initial PPP1 loan has submitted to the Administration a Form 1502 report related to the loan. For example, a borrower applies and receives for a PPP1 loan for the maximum $2 million, but could have qualified for more if not for the maximum loan threshold. After receiving the PPP1 loan, the SBA changes the Interim Final Rule to increase maximum a borrower may receive. This new legislation would allow that borrower to receive (in coordination with their lender) the incremental amount.
The forgivable payroll cost definition has been expanded to include amounts an employer paid for life insurance and disability insurance costs.
Paycheck Protection Program 2.0 (PPP2)
Available to Small businesses that have been impacted by a significant decrease in revenue because of the COVID-19 pandemic. This program contains a very explicit set of “need” qualifications, as compared to the PPP1 “good faith” certifications.
What is a small business?
Employs not more than 300 employees, OR
Qualifies as a small business concern by the annual receipts size standard, or meets the alternative size requirements of SBA Act §3(a)(5).
For example, a Nonchocolate Confectionery Manufacturer (NAICS Code 311340) has an employee size standard of 1,000 employees due to the labor needs within the manufacturing process. If such a borrower has over 300 employees, but less than 1,000 employees, that borrower would qualify under this exception.
Affiliation rules will remain in effect for determining eligible entities.
What is the “need” qualification?
Any small business whose sales (gross receipts) decreased by 25% or more during the first, second, or third calendar quarter of 2020 (or only with respect to an application submitted on or after January 1, 2021, fourth quarter in 2020), compared with the same quarter in 2019. Below are some further clarifications:
A PPP2 loan can only be made to an entity that: - Received a loan under the original PPP loan program, AND - On or before the expected disbursement date of the PPP2 loan, has used, or will use, the full amount of the entity’s original PPP loan funds
Non-Eligible Entities
An issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f)—that is a public company
Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances)
Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under §120.111)
Life insurance companies
Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify)
Pyramid sale distribution plans
Businesses deriving more than one-third of gross annual revenue from legal gambling activities
Businesses engaged in any illegal activity
Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans
Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs
Private clubs and businesses which limit the number of memberships for reasons other than capacity except if the business concern is an organization described in paragraph (36)(D)(vii) (i.e. §501(c)(6) organizations)
Any business concern or entity primarily engaged in political or lobbying activities, which shall include any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public documents
Maximum Loan Amount
The smaller of:
Two-and-a-half (2.5) months of average total payroll costs incurred or paid by the eligible entity during
Calendar year 2019, OR
1-year period before the date on which the loan is made
*Seasonal payroll period and an alternative period for new entities not in existence prior to February 15, 2019 is available
$2,000,000 (down from the PPP1 maximum of $10,000,000)
For those entities with a NAICS code 72 (Accommodation and Food Services):
Three-and-a-half (3.5) months of average total payroll costs incurred or paid by the eligible entity during
Calendar year 2019, OR
1-year period before the date on which the loan is made
*Seasonal payroll period and an alternative period for new entities not in existence prior to February 15, 2019 is available
$2,000,000 (down from the PPP1 maximum of $10,000,000)
Affiliation rules will remain in effect for determining maximum loan amounts.
Permitted Use of PPP2 Loan Proceeds
In addition to the below categories of permitted expenses, the previous PPP1 requirement that 60% of expenses must be used toward payroll costs remains in effect.
Payroll costs
Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation)
Any covered operations expenditure
A payment 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
Any covered property damage cost
A cost 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
Any payment on any covered rent obligation
Any covered utility payment
Any covered supplier cost
An expenditure made by an entity to a supplier of goods pursuant to a contract, order, or purchase order in effect before the date of disbursement of the covered loan for the supply of goods that are essential to the operations of the entity at the time at which the expenditure is made
Any covered worker protection expenditure
An operating or a capital expenditure that is 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 Centers for Disease Control, or the Occupational Safety and Health Administration 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 with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19
Prohibited Uses of PPP2 Loan Proceeds
Lobbying activities, as defined in section 3 of the Lobbying Disclosure Act of 1995
Lobbying expenditures related to a State or local election
Expenditures designed to influence the enactment of legislation, appropriations, regulation, administrative action, or Executive order proposed or pending before Congress or any State government, State legislature, or local legislature or legislative body
Modifications to Original Paycheck Protection Program (PPP1)
Selection of Covered Period for Forgiveness
Congress has modified the Cover Period terms to allow for an early filing for forgiveness. A “covered period” is now defined as:
Begins on the date the loan proceeds are received by the borrower and
Ends on a date selected by the borrower that falls between - Eight weeks after the date the funds were received by the borrower and - Twenty-four weeks after the date the funds were received by the borrower
For example, if a borrower fully spent their PPP loan proceeds by the 12th week, the borrower could elect a 12-week covered period and immediately file for forgiveness at that time. This differs from the previous rule that a borrower could claim either an 8-week covered period or 24-week covered period, but not a variation in between those two.
We do not yet know if this replaces, changes, or nullifies the PPP1’s “alternative payroll covered period” (APCP) previously available for PPP1 loans.
One Page Forgiveness Application for Loans of Up to $150,000
While we will need to wait until the SBA determines how to administer this portion of the law, we believe the “Simplified” forgiveness application (Form 3508S), which was previously limited to PPP loan $50,000 or less will be adjusted to account for loan $150,000 or less.
Loans Over $150,000 But Less Than $2,000,000
The borrower is not required to submit:
Documentation verifying the number of full-time equivalent employees on payroll and pay rates (which included payroll tax filings reported to the Internal Revenue Service; and State income, payroll, and unemployment insurance filings);
Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, payments on covered operations expenditures, payments on covered property damage costs, payments on covered supplier costs, payments on covered worker protection expenditures, and covered utility payments;
The borrower will be required to retain:
All employment records relevant to the application for loan forgiveness for the 4-year period following submission of the application; AND
All other supporting documentation relevant to the application for loan forgiveness for the 3-year period following submission of the application; AND
May complete and submit any form related to borrower demographic information.
Modification to FTE Safe Harbor 1
The Borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if the Borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and September 30, 2021 (previously December 31, 2020), by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19
Modification to FTE Safe Harbor 2
The taxpayer must meet the following criteria for this FTE safe harbor:
The borrower must have had a reduction in FTE in the period from February 15, 2020 to April 26, 2020 when compared to FTE at February 15, 2020 and
The borrower has eliminated the reduction by September 30, 2021 (previously December 31, 2020)
FTE Reduction Exemption
The amount of loan forgiveness with respect to a reduction in FTEs shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith, is able to document:
An inability to rehire individuals who were employees on February 15, 2020 and
An inability to hire similarly qualified employees for unfilled positions on or before September 30, 2021 (previously December 31, 2020)
While we understand that this law was passed in an expedited fashion, we fully expect additional complementary guidance to be issued by the SBA, and/or further Congressional action. Similar with PPP1, these additional programs and changes are to be administered by the SBA, so while Congress has laid the framework for these programs, the SBA will be required to produce the forms, applications, instructions, and FAQs by which this program will be governed. We will continue to monitor these announcements and publications to provide you with up-to-date information.
Please reach out to us with any questions.