‘New and improved’ PPP loans help small businesses hard hit by COVID-19 — but there’s a deadline to get the money
On Dec. 27, the new stimulus package — formally called the Consolidated Appropriations Act, 2021 (the CAA) — became law. That’s good news for small business owners: one section of the CAA resurrects the Paycheck Protection Program (PPP) with better terms for borrowers.
Here’s what you need to know, starting with a brief history lesson.
The original PPP
The PPP was originally established by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to make loans to small businesses affected by COVID-19-related economic fallout. That was a noble goal, but the original PPP deal expired on Aug. 8, 2020.
The new-and-improved PPP
The CAA resurrects the PPP with $284 billion in new funding, liberalized rules, and most importantly, the new second-draw loan program explained immediately below. New PPP loans, including second-draw loans, can be taken out through March 31, 2021 or until the money runs out.
Second-draw loans
The CAA ups the PPP game to allow eligible businesses to take out so-called second-draw PPP loans. These are targeted at 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.
To be eligible, a business (including an eligible sole proprietorship activity) 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 this year, you 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 payroll costs in the year prior to the loan or the calendar year or 3.5 times payroll costs for businesses in the especially-hard-hit accommodations and food service industries.
Expanded list of expenses that qualify borrower for loan forgiveness
The CAA adds the following expenses to the list of qualifying expenses that can result in PPP loan forgiveness. This expanded list is generally retroactive to Day One of the original PPP.
- Eligible operations expenditures, which include 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.
- 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 3/1/20 and the end of the national COVID-19 emergency declaration (whenever that happens).
60/40 rule still applies
As before, the 60/40 rule still applies. That means that to be eligible for full PPP loan forgiveness, your business must spend at least 60% of the loan proceeds on qualifying payroll costs (including certain healthcare plan costs) and the remainder on other qualifying expenses (such as mortgage interest, rent, utilities, and the other expenses listed above).
If your business doesn’t clear the 60% payroll cost hurdle, it may still be eligible for partial forgiveness of its PPP loan.
Covered period
In calculating the amount of eligible expenses for purposes of qualifying for PPP loan forgiveness, borrowers that received their first loan before 6/5/20 could choose between: (1) the eight-week covered period established by the CARES Act for incurring eligible expenses or (2) the 24-week covered period established by later legislation for incurring eligible expenses. Borrowers that received their first loan on or after 6/5/20 were required to use the 24-week covered period. The CAA allows borrowers to choose between an eight-week covered period and a 24-week covered period. For now, however, it’s not clear if this option will apply retroactively to loans made before the 12/27/20 date of enactment of the CAA. We await guidance on that question.
Tax impact of forgiven PPP loans: more good news
Another piece of the CAA is called the COVID-Related Tax Relief Act of 2020 (the COVIDTRA). While PPP loan forgiveness was always a federal-income-tax-free event, the COVIDTRA clarifies that you can deduct expenses that you pay for with proceeds from a forgiven PPP loan. And you can obtain tax basis in assets that you pay for with proceeds from a forgiven PPP loan. Finally, you don’t have to reduce so-called tax attributes (such as a net operating loss carryover or a capital loss carryover) when your PPP loan is forgiven. These favorable changes are all retroactively effective to Day One of the PPP. Good!
Simplified forgiveness application for small loans
Last but not least, the CAA mandates a simplified one-page application to apply to the Small Business Administration (SBA) for forgiveness of a PPP loan that does not exceed $150,000. The simplified application will only require the borrower to state 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 need be provided to the SBA with the simplified application. However, you must attest that you met applicable guidelines when the PPP loan was taken out. Fair enough.
The bottom line
There you have it: a summary of the favorable changes in the CAA for PPP loans. However, the PPP has proven to be a moving target, and more changes could be included in future legislation. So, stay tuned. I’ll do my best to keep you informed.
