As previously reported, the $900 billion COVID-19 stimulus Bill contains an additional $284 billion for additional PPP loans for small businesses, referred to as Second Draw Loans. Some of the new rules and rule changes apply to both the Initial and Second Draw PPP loans. Below are the details of the Bill, with respect to PPP and EIDL loans and changes to the Employee Retention Credit rules:
1. Tax Deductibility
The Bill clarifies that business expenses claimed and forgiven under the PPP loan program are deductible for tax purposes. Specifically, the Bill states:
For the purposes of the Internal Revenue Code of 1986:
a. No amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness,
b. No deduction shall be denied, no tax attribute will be reduced, and no basis increase will be denied by reason of the exclusion from gross income provided by (I).
The amendments made by this Bill will apply to 2020 and beyond.
This reverses the IRS rulings on PPP expense deductibility, including those contained in IRS Rev. Rul. 2020-27, Rev. Proc. 2020-51 and IRS Notice 2020-32.
2. Effective Date
With a few exceptions, the amendments made by this Bill will be effective, as if they were part of the CARES Act, and will apply to any loan made pursuant to the Act, including loan forgiveness. Some of the amendments do not apply to loans already forgiven, but, importantly, the tax deductibility does.
3. Eligible expenses
The type of expenses that are eligible for forgiveness have been extended. In addition to payroll, rent, mortgage interest, and utility expenses, there are four new categories:
a. Covered operations expenditure. Payments for any business software or cloud computing service that facilitates business operations around product or service delivery, payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies and inventory.
b. Covered property damage cost. Costs related to property damage, vandalism, or looting due to public disturbances that occurred during 2020, that were not covered by insurance or other compensation.
c. Covered supplier cost. Expenditures made by a borrower to a supplier for the supply of goods that are essential to the operations of the borrower and made pursuant to a contract or purchase order.
d. Covered worker protection expenditure. An operating or capital expenditure to adapt business activities to comply with requirements established, or guidance issued, by the HHS, CDC, OSHA, or State or local governments, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirements related to COVID–19. Examples include the purchase and maintenance of PPE, drive-through window facilities, indoor ventilation or filtration systems, and sneeze guards.
Eligibility of insurance expenses paid by the borrower during the covered period are extended to include group life, disability, vision, or dental insurance. Workers’ comp insurance is still excluded.
4. Simplified Loan Forgiveness Application
For any PPP loan (Initial or Second draw) up to (and including) $150,000 in value, the application process and documentation will be simplified. The certification will be no more than one page in length and state:
a. The number of employees the borrower was able to retain because of the PPP loan.
b. The estimated amount of the loan amount spent by the borrower on payroll costs.
c. The total loan value.
The borrower will have to retain relevant records that prove compliance with the loan requirements for (a) 4 years, for employment records, and (b) 3 years with respect to other records. A borrower, of no more than $150,000 will not, at the time of the application for forgiveness, be required to submit any documentation in addition to the signed certification and above information.
Forgiveness procedures and the documentation required for PPP loans of greater than $150,000 remain unchanged.
5. Eligible Entities
Eligible borrowers of the Second Draw PPP program can be any business concern, nonprofit organization, housing cooperative, veterans organization, Tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative that:
a. Employs not more than 300 employees, and
b. Can demonstrate that they had a reduction in gross receipts, during any quarter of 2020, of more than 25%, compared to gross receipts during the same quarter in 2019. This gross receipt reduction eligibility can even apply to companies in business for some or none of 2019, as long as they were in operation by February 15, 2020.
The Bill explicitly expands PPP eligibility to include local newspapers, television, and radio broadcasters.
Eligibility is not affected by whether the borrower received a PPP loan in the Initial round, whether they have applied for, or received forgiveness, for that Initial loan.
The Bill does not answer the question of whether gross receipts can be calculated on an accrual basis, or a cash basis, or either.
6. Nonprofit and Veterans Organizations
For the purposes of calculating gross receipts for a nonprofit organization, or a veteran’s organization, gross receipts will have the meaning of section 6033 of the Internal Revenue Code of 1986.
7. Ineligible Entities
Businesses that are ineligible include:
a. Businesses ineligible under 13 CFR § 120.110 (such as banks and life insurance companies).
b. Any business concern or entity primarily engaged in political or lobbying activities.
c. Any business created or organized under the laws of the People’s Republic of China, or whose main operation is based in China, or who has Chinese members on its board of directors.
d. Any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938.
e. An eligible person or entity that has received a grant under section 24 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.
8. Maximum Loan Amount
a. The maximum amount of a PPP 2nd Draw loan is the lesser of (a) $2 million and (b) 2.5x the average monthly payroll costs incurred or paid by the borrower during (at the election of the borrower) (i) the trailing twelve months before the date of the loan application; or (ii) 2019.
b. The maximum amount of a loan made to eligible entities that are assigned a NAICS code beginning with 72 (hospitality companies including hotels, bars and restaurants), is the lesser of 3.5x the average monthly payroll costs or $2 million.
c. The look-back period is different for seasonal employers and new businesses that have operated for less than 12 months.
d. Borrowers who have received an Initial PPP loan may not receive a Second Draw PPP loan that pushes their aggregate borrowing over $10 million.
e. Businesses with more than one location can only receive one loan of up to $2 million and only if they have a maximum of 300 employees per location.
9. Simplified Loan Application
If a borrower is applying for a loan of $150,000 or less, then, instead of submitting financials to the lender, the applicant may submit a certification attesting that they meet the applicable gross receipts decrease requirement. However, at the time of their application for forgiveness, they must produce adequate documentation that they met such gross receipts decrease standard.
10. Forgiveness Amount
Forgiveness of indebtedness of a PPP loan will be the amount equal to the sum of the following costs incurred, or expenditures, made during the covered period:
a. Payroll costs, includes wages, bonuses and health insurance contributions made by the employer.
b. The interest of covered mortgage obligations.
c. Covered operations expenditure (as defined above).
d. Covered property damage costs (as defined above).
e. Covered rent obligations.
f. Covered utility payments.
g. Covered supplier costs (as defined above).
h. Covered worker protection expenditure (as defined above).
Payroll costs still must be a minimum of 60% of total eligible costs.
11. Ability of PPP Borrowers to Request an Increase in Loan Amount Due to Updated Regulations
As a result of the updated regulations in this Bill, certain eligible entities may request an increase in their PPP loan amounts as follows:
a. If an eligible PPP recipient has returned all or part of their loan, that entity may reapply for a PPP loan for an amount equal to the difference between the amount retained and the maximum amount applicable.
b. If an eligible recipient did not accept the full amount of a PPP loan offered, that entity may request a modification to increase the amount of the loan to the maximum amount applicable.
c. If an entity is eligible for an increased loan amount, because of an interim final rule issued by the SBA that allows for loan increases, then that entity may submit a request for an increase in the loan amount even if:
i. The initial loan amount has been fully disbursed; or
ii. The lender of the initial loan has submitted, to the SBA, a Form 1502 report related to the loan.
12. Flexibility in Deferral of Payments of SBA 7(a) Loans
The Bill allows the SBA Administrator to provide full payment deferment relief (including payment of principal and interest) of SBA 7(a) loans for a further period of not more than 1 year, and to provide an additional deferment period if the borrower provides documentation justifying such additional deferment.
13. Extension and Modification of Employee Retention Credit
The bill expands and significantly improves the Employee Retention Tax Credit (ERC), offering a 70% credit on up to $10,000 of wages per employee per quarter and reduces the gross receipts decline from 50% to 20%. The Bill also improves the coordination between the ERC and the PPP by allowing access to both programs while preventing a double-dip. The bill extends the ERC credit to June 30, 2021.
14. Targeted EIDL Advances for Certain Small Businesses
The bill has allocated $20 billion of EIDL grants for entities:
a. Located in low-income communities.
b. That have suffered an economic loss of greater than 30 percent. Economic loss will be the amount by which the gross receipts of the entity declined during an 8-week period between March 2, 2020, and December 31, 2021, relative to a comparable 8-week period immediately preceding March 2, 2020, or during 2019.
c. That employ not more than 300 employees.
These additions and amendment to PPP, EIDL and ERC shall be covered in a KROST Webinar with live Q&A, hosted by Paren Knadjian, on Wednesday, December 23rd at 2pm PST, register below.
Have questions about COVID-19? We have created a Resource Center for individuals and businesses.
[WEBINAR] PPP Second Draw Program – Rules for Eligibility and Forgiveness w/ Live Q&A
Wed, Dec 23, 2020 2:00 PM – 3:00 PM PST
The $900 billion COVID-19 relief Bill has been published, and even though it has not been signed into law, it contains all the details of the new $284 Billion Paycheck Protection Program, including rules for eligibility, maximum amounts, new qualified expenses, and simplified forgiveness application documentation. It also contains definitive rules on the tax deductibility of expenses forgiven under both the Initial and Second Draw loan program.
This webinar will give sufficient details about the program so that customers are prepared and ready to apply as soon as lenders make new PPP loan applications available.
Paren Knadjian, Practice Leader
Mergers & Acquisitions, Technology, PPP Forgiveness
Paren is the practice leader of the M&A and Capital Markets group at KROST. He comes with over 15 years of experience in mergers and acquisitions as well as equity and debt financings. In that time, Paren successfully completed over 50 transactions acting as a both a buy-side and sell-side advisor, as well as a broker/dealer. » Full Bio