Like college students right before winter break, the 116th Congress closed its term with one last all-nighter. And, while the Consolidated Appropriations Act, 2021 does not include many relief provisions deemed vital by Democrat or Republican representatives and senators, there is still much that both sides agreed was necessary – especially for small and mid-sized businesses. It also contains many Divisions, each with many Titles, so don’t be surprised if you hear it called by many names. We will just refer to it as the Act.
The most significant business relief provisions come in a subsection of the Act known as the Continuing the Paycheck Protection Program Act. This was lifted almost entirely from a bill of the same name introduced in October by Senators Collins and Rubio. Another provision comes from a bill known as the Small Business Expense Protection Act of 2020 introduced in May by Senator Cornyn. The new small business relief includes:
Deductibility of expenses paid for with PPP loan funds (and EIDL grants)
Despite members of Congress telling the Internal Revenue Service (“IRS”) expressly from the time the CARES Act was passed in March that it was their intent that expenses funded with Paycheck Protection Program (“PPP”) loan proceeds should be deductible for tax purposes, the Service still promulgated guidance saying they weren’t. The Act now makes clear that such expenses ARE deductible, that the amount of loan forgiveness is not taxable, and that neither has any effect on tax basis.
The Act goes on to provide that EIDL grants are not taxable income and expenses paid with grant funds are fully deductible.
More ways to obtain PPP loan funds
The Act provides for both a second round of PPP loans and a way for borrowers to increase the amount of their original loans.
- Increasing round one loans:
--In the early days of the PPP loans, the SBA was releasing guidance as quickly as they could.
--Borrowers were trying to get loan applications completed before the allocated funds were exhausted.
--Some borrowers could have borrowed more based on later issued guidance but were precluded from doing so because of the “one loan” rule.
--The Act allows affected borrowers to now go back to their lenders and increase their loans based on later released guidance.
- Borrowers who returned their original loans
--SBA has 17 days after passage of the Act to provide guidance
--Eligible borrowers who returned all or part of their original loans may reapply for the difference
--Eligible borrowers who didn’t accept the full amount of the loan may apply to increase the loan to the maximum amount allowed
WHO BENEFITS: While there are many borrowers whose loans could have been larger, this is a significant benefit for partnerships and certain sole proprietors who borrowed early in the first round of PPP loans. At the time, it appeared that they could borrow based only on the wages they paid to employees and could not include an equivalent amount of partner compensation or self-employment income. Once the SBA released guidance clarifying this confusion, it was too late for them to go back to their lenders and increase the loan size. This provision cures the inequity.
- Second round of PPP loans:
--$267.5 billion allocated – some from funds left over from the April PPP refill
--$25 billion is reserved for businesses with 10 or fewer employees as of February 15, 2020
- Eligible businesses may apply for a SECOND PPP loan
--To apply for these loans, a business must have 300 or fewer employees AND have experienced a gross receipts decline of 25% in any quarter in 2020 compared to the same quarter in 2019
--Loan cannot exceed $2 million and all loans to all affiliated borrowers from both the first and second round cannot exceed $10 million
--Loan cap is 2.5 times the average monthly payroll for the twelve months through the date of application or the average monthly payroll for 2019
--For accommodation and food service businesses (NAICS Code 72), the maximum loan is calculated at 3.5 times monthly payroll but still not to exceed $2 million
- The covered period for new loans runs through March 31, 2021
- Not-for-profit business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (so-called 501(c)(6) organizations) which were previously not eligible PPP loan borrowers may now apply if:
--They have 150 or fewer employees,
--Less than 10% of their gross receipts come from lobbying activities, and,
--Lobbying activities comprise less than 10% of their total activities
- Housing cooperatives with not more than 300 employees may also apply
OBSERVATION: While the Act doesn’t explicitly say so, it is likely that borrowers of second-round PPP loans will have to make the same certification that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations.” This certification was also required of first-round PPP borrowers.
More ways and more time to spend PPP loan funds
One complaint about the CARES Act was that it severely constrained allowable uses of PPP loan funds. Many businesses were incurring unusual costs to make it safe for their employees to work and yet such costs were ineligible expenses. The Act rectifies that by adding the following to the list of acceptable loan expenditures:
- Covered operations expenditures
--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
- Covered property damage costs
--A cost related to property damage, vandalism and looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation
- Covered supplier costs
--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 at the time at which the expenditure is made
- Covered worker protection expenditures
--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 COVID-19 national emergency declaration expires
- Payroll costs now include payments for group health care or other group insurance benefits, including insurance premiums
--This includes group life, disability, vision or dental insurance
The Act also clarifies that the covered period of a PPP loan begins on the date the loan is originated and ends on a date selected by the borrower that occurs during the period beginning on the date that is eight weeks after the origination date and ending on the date that is 24 weeks after the origination date.
None of this changes the fact that to have the loan completely forgiven, at least 60% of loan proceeds must be spent on payroll and associated eligible costs.
Changes to PPP Loan Forgiveness
The Act makes it easier for certain borrowers to obtain forgiveness of their PPP loans. These new rules apply to both original PPP loans as well as new loans under the ACT.
For loans less than $150,000:
- SBA has 24 days after the Act is passed to create a new one-page form
- Borrower attests that it complied with all loan requirements and provides certain limited information
- Loan is forgiven
- Borrower still has to retain records for three years (four years for employment records)
The Act also provides guidance to the SBA regarding how it may audit PPP loans. Within 45 days after the Act is passed, the Administrator has to submit an audit plan to Congress detailing both the policies and procedures for auditing covered loans and the metrics to be used in determining which loans will be subjected to audit.
Finally, the Act repealed the requirement that PPP borrowers reduce their loan forgiveness amount by the amount of any EIDL grants.
Enhancements to the Employee Retention Credit
The CARES Act created the Employee Retention Tax Credit (“ERTC”) to encourage businesses to keep employees on payroll even if they weren’t working. To prevent double dipping, employers who received PPP loans were ineligible for the ERTC even if those employees were paid with other than PPP loan funds.
The Act now allows employers to take the credit based on those payments. It also makes other changes significantly expanding eligibility for the credit. PPP loan borrowers who may now be eligible to take the ERTC should consider waiting to apply for PPP loan forgiveness until more guidance on the ERTC is released.
Additional payroll tax deferral
On August 8th, the President issued a proclamation allowing employers to defer withholding and depositing certain payroll taxes for the balance of 2020. Such deferred employment taxes were to be withheld and deposited ratably from January 1st through April 30th, 2021. The Act changes April 30th to December 31st, 2021.
What isn’t in the ACT?
There is still much confusion related to PPP Loan forgiveness. Most of it centers on how borrowers qualify for the safe harbors relating to full-time equivalent employee counts and the effect on the amount of loan eligible for forgiveness. The Act doesn’t provide any new guidance on safe harbor qualification or any of the other uncertainties surrounding the various PPP loan forgiveness safe harbors.
The Act also doesn’t directly address the PPP Loan Necessity Questionnaire (Form 3509) that the SBA released last month and which banks are now requiring some borrowers with loans of $2 million or more to complete. It is possible that the audit language of the Act will require the SBA to reconsider the use of these forms
Finally, guidance is not yet complete on how to handle PPP loans and loan forgiveness calculations subsequent to merger and acquisition transactions. Even though this problem is of more limited applicability, it would be nice if either Congress or the SBA would let affected borrowers know what they are supposed to do.
Something to note: As a holiday present to all of us, the SBA has 10 days from passage of the Act to issue regulations implementing the changes to the PPP loan program!
We will continue to update you as new guidance is released, and will soon issue a summary of the Act, analyzing its unemployment, stimulus, tax, and other provisions in greater detail. In January, Friedman will be hosting a webinar to cover the Act and its impact on SMBs. In the meantime, please contact your Friedman LLP advisor with any questions.