The Consolidated Appropriations Act (CAA) extends, liberalizes and expands the Paycheck Protection Program (PPP). Originally established by the CARES Act, the PPP expired on August 8, 2020. Now the CAA resurrects it. Here are the most important things small businesses should know from this section of the new law.
What’s the Tax Impact of Forgiven PPP Loans?
There’s good news about the tax treatment of forgiven Paycheck Protection Program (PPP) loans. The Consolidated Appropriations Act (CAA) clarifies that no deduction or tax basis increase is denied for expenditures paid with proceeds from forgiven PPP loans.
If your business takes out a PPP loan that’s forgiven, the forgiveness was always tax-exempt. The CAA clarifies that you can deduct expenses that were paid for with proceeds from forgiven PPP loans.
Simplified Forgiveness Application for Small Loans
The new law also mandates a simplified one-page application to apply to the Small Business Administration (SBA) for forgiveness of a PPP loan that doesn’t exceed $150,000. SBA has not released the new simplified one-page application yet.
The simplified application will require the borrower to state only two things:
- The number of employees the borrower was able to retain because of the PPP loan, and
- The estimated total amount of PPP loan proceeds that were spent on payroll costs.
No other documentation will need to be provided to the SBA with the simplified application. However, the borrower must attest that applicable guidelines were met when the PPP loan was taken out.
Economic Injury Disaster Loans (EIDL) Advance
CAA repealed the deduction of any EIDL Advances received from a PPP borrower from the loan forgiveness payment remitted by the SBA to the lender as originally required by the CARES Act. The SBA began remitting such payments with required EIDL Advance deductions on October 2, 2020. For those loans where SBA remitted a forgiveness payment to a lender that was reduced by an EIDL Advance, SBA will automatically remit a reconciliation payment to the lender for the previously deducted EIDL Advance amount, plus interest through the remittance date. Borrower forgiveness will be increased by the previously deducted EIDL Advance amount.
First Draw Loans
First draw PPP loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
Eligible small entities, that together with their affiliates (if applicable), have 500 or fewer employees—including nonprofits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors—can apply. Entities with more than 500 employees in certain industries that meet SBA’s alternative size standard or SBA’s size standards for those particular industries can also apply.
Existing PPP borrowers that did not receive loan forgiveness by December 27, 2020 may: (1) reapply for a first draw PPP loan if they previously returned some or all of their first draw PPP loan funds, or (2) under certain circumstances, request to modify their first draw PPP loan amount if they previously did not accept the full amount for which they are eligible.
Expanded List of Expenses That Qualify for Loan Forgiveness
The new law adds the following expenses to the list of qualifying expenses that can result in PPP loan forgiveness:
- Eligible operations expenditures, including payments for software, cloud computing, and human resource and accounting needs,
- Eligible uninsured property damage costs resulting from public disturbances that occurred in 2020,
- Eligible supplier costs, and
- Eligible expenditures for worker personal protective equipment (PPE) and eligible expenditures to help the borrower comply with COVID-19 federal health and safety guidelines or equivalent state and local guidelines, issued between March 1, 2020, and the end of the national COVID-19 emergency declaration (whenever that happens).
This expanded list of qualifying expenses is generally retroactive to March 2020, when the CARES Act was signed into law.
To be eligible for full PPP loan forgiveness, a business must spend at least 60% of the loan proceeds on qualifying payroll costs (including certain health care plan costs) and the remaining 40% on other qualifying expenses (such as mortgage interest, rent, utilities and the other expenses listed above) during the 8- to 24-week covered period. If your business doesn’t clear the 60% payroll cost hurdle, however, it may still be eligible for partial forgiveness of its PPP loan.
Second Draw Loans
Under the new law, eligible small businesses can take out so-called “second draw” PPP loans. This provision targets smaller and harder-hit businesses with 300 or fewer employees that have used up, or have plans to use up, the full amount of their initial PPP loans. The maximum second draw loan amount is $2 million. Only one, second draw loan can be taken out between affiliated businesses.
To be eligible, a business must demonstrate at least a 25% decline in gross receipts in the first, second, or third quarter of 2020, compared to the corresponding 2019 quarter. For loan applications submitted after December 31, 2020, the business can use gross receipts for the fourth quarter of 2020, compared to gross receipts for the fourth quarter of 2019.
An eligible business can generally borrow up to 2.5 times its average monthly 2019 or 2020 payroll costs up to $2 million. The limit is increased to 3.5 times payroll costs up to $2 million for businesses in the hard-hit accommodations and food service industries, those assigned a NAICS code beginning with 72 (click HERE to confirm NAICS 72 code).
How and When to Apply
The second round of the PPP, which includes the new second draw opportunity, is funded with $284 billion. New first draw and second draw PPP loans can be made through March 31, 2021, or until funding is exhausted. All new first draw and second draw PPP loans will have the same terms regardless of lender or borrower.
To promote access to capital, initially, only community financial institutions will be able to make first draw PPP loans on Monday, January 11, and second draw PPP loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter.
First Draw PPP Borrower Application (revised January 8, 2021) can be found HERE.
Second Draw PPP Borrower Application can be found HERE.
The CAA includes several favorable changes for PPP loans. However, the PPP has proven to be a moving target, and more changes could be included in future legislation. We’ll continue to give you updates on the provisions most likely to affect you or your business in the near future. Please contact us with any questions or concerns about these new tax provisions affecting your individual financial or business situations.
We’re here to help.
In the meantime, visit a special section on our website COVID-19 Tax & Business Implications.