Congress Approves New Round of PPP and Rules on Deductibility
Dec 22, 2020
Congress has been meeting seemingly around the clock in an effort to pass a bill before heading home for the holidays which, among other things, would provide a much-needed second round of Paycheck Protection Program (PPP) Stimulus. As of late Monday, December 21st, they were finally able to agree on negotiations and vote to approve this bill. President Trump is expected to sign this bill into law over the next few days.
What are the details?
Updates to the existing PPP program
First and foremost, the issue regarding the deductibility of expenses used for PPP1 loan forgiveness was finally resolved as Congress agreed, despite the push-back of the Treasury, to include legislation that allows for the deductibility of such expenses. This means that businesses who received a PPP1 loan (application deadline of August 8, 2020) that has been forgiven, or that they expect to be forgiven, can now deduct those related expenses from taxable income. This will result in a tax-free infusion of cash into many small businesses across America, which is in line with the original Congressional intent.
In addition to the deductibility of those expenses, additional items have been added to the list of qualified expenses for loan forgiveness. Among these are operating expenditures related to software or cloud computing that facilitates business operations, property damage costs (due to looting/vandalism that occurred during 2020 and were NOT covered by insurance), certain supplier costs, and covered worker protection expenses related to the adaptation of businesses per regulatory requirements imposed by the CDC, Health and Human Services, etc. These additional expenditures are only allowable for businesses that have not yet applied for forgiveness.
Congress also provided for modified covered periods in relation to PPP1 which gives businesses the option to select a covered period that falls anywhere BETWEEN 8 and 24 weeks after the loan origination date.
The bill repeals the requirement that EIDL (Economic Injury Disaster Loan) advances be deducted from the PPP forgiveness amount, and it allows the Employee Retention Credit to be claimed by PPP Loan recipients.
Finally, also retroactive to PPP1 is a much-desired streamlined application process for loans amounting to $150,000 or less. These applications require qualified businesses only to submit a one-page application that identifies the number of employees the borrower was able to retain as a result of receiving the PPP loan, the estimated amount of loan proceeds spent on payroll costs, and the total amount. Beyond that, borrowers need to simply attest to the fact that they complied with PPP requirements, and they are done. Gone is the need for hours and hours of painstaking calculations and document retrieval.
This wave of stimulus will appropriate roughly $900 billion for a host of provisions, but for the purposes of this post, we will focus on new funding for the Paycheck Protection Program (PPP2) specifically. To begin, the maximum loan amount allowed in this round is $2 million, down from $10 million with PPP1, and it will target two groups specifically:
1. A second draw for the hardest hit borrowers from PPP1. Items to consider for qualifications of this group are as follows:
- 300 or fewer employees; and
- 25% gross receipts decline in any quarter in 2020 compared with the same quarter in 2019
- EIDL and PPP proceeds are NOT included in gross receipts
- Based on calendar quarter (not any consecutive 3-month period)
- Tiered system where certain loans only require self-certification while others will need supporting documentation
- Full use of your PPP1 loan amount
- All loans will be subject to SBA review – congress is appropriating funds to the SBA to support manpower needed to conduct reviews of PPP loan applications so it can be expected that there will in fact be reviews by the SBA
2. First time PPP borrowers. Eligibility is as follows:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Accommodation and foodservice businesses that average less than 500 employees per physical location
- Non-profits, including churches
NEW in this round is 501(c )(6) and destination marketing organizations with 150 or fewer employees – think economic development, chambers of commerce, tourism, etc. – subject to certain lobbying thresholds
The structure of PPP2, including the loan calculation formula, eligible use of proceeds, and forgiveness feature are very similar to that of the updated PPP1. In general:
- The loan amount will be computed as 2.5 months of payroll. **Hotels and restaurants can get up to 3.5 times their average monthly payroll costs (subject to the $2 million maximum)**
- Eligible uses of PPP2 funds will include payroll, rent, utilities, and mortgage interest just as in PPP1 as well as the additional eligible expenses noted in the “Updates to PPP1” section above.
- PPP2 loan forgiveness will be tax-free and related expenses are deductible.
- PPP2 loans will follow the new simplified forgiveness process.
What should I do now?
It is expected that the SBA will begin accepting PPP2 loan applications sometime in January, so now is the time to begin considering the need for a second PPP loan and whether your business satisfies the requirements outlined above. With the PPP forgiveness expense deductibility question answered, you may need to revisit your tax projections. We also recommend that you consider taking advantage of the Employee Retention Credit if you are newly eligible.
Watch for additional WVC resources including blog posts and webinars with more details on PPP2 and other items included in this round of stimulus. Contact your WVC advisor to discuss the nuances of this new stimulus package and how it will impact your business.