On December 21, 2020, Congress passed a new round of Covid-19 stimulus and relief provisions as part of the Consolidated Appropriations Act. This legislation added a new round of stimulus checks to be paid to individuals, an extension of the increased unemployment benefits, and many other covid-19 relief and economic stimulus provisions, including taxpayer favorable changes to the existing Payroll Protection Program (PPP) loan rules, and a second tranche of loans for businesses whose revenues declined in 2020.
Key Provisions Include:
- Full deductibility of expenses paid with the proceeds of both the original loan program and the “second draw” program for loan recipients whose loans are forgiven.
- A second round of loans for taxpayers whose revenues declined in 2020.
- An expansion of qualified expenses that are eligible for forgiveness for certain borrowers.
- Streamlined forgiveness procedures for loans up to $150,000.
Deductibility of Expenses
Congress specified in the original loan program in the CARES Act that forgiveness of the PPP loans would not create taxable “forgiveness of indebtedness” income for recipients. The Internal Revenue Service subsequently determined that under the tax law, any expenses paid for with tax exempt income would be non-deductible, effectively making the forgiveness a taxable event, potentially surprising many recipients with an unexpected tax increase.
In the Consolidated Appropriations Act, Congress confirmed its original intent by stating that no deductions would be reduced as a result of the forgiveness of the loan, both for the original round of PPP loans and the second loan program, ensuring that the forgiveness would not increase recipients’ taxable income.
Simplified Application for loans under $150,000
Recipients whose loans do not exceed $150,000, will now be eligible for a simplified one-page forgiveness application which will include: the number of employees the recipient was able to retain due to the loan, the estimated amount of the loan proceeds spent on payroll costs, and the total amount of the loan.
Expansion of Eligible Uses of Loan Proceeds
The act expands the types of expenses eligible for forgiveness under the PPP loan program. The new categories of expenses are:
- Operations Expenditures – Payments or expenses for business software or cloud computing services used for operations.
- Property Damage Costs – Payments or expenses related to property damage, vandalism, and looting due to public disturbances during 2020 that were not covered by insurance or other compensation.
- Supplier Costs – Payments or expenses for supply of goods that are made pursuant to a contract, order, or purchase order that was either:
- In effect at any time before the covered period with respect to the loan, or
- with respect to perishable goods for an order in effect either before or during the covered period.
- Worker Protection Expenditures – Payments or expenses for both operating and capital expenditures required to comply with COVID-19 related worker and customer safety requirements including:
- Personal protective equipment and particulate filtering face piece respirators
- Capital Improvements such as a drive-through window facility, certain air filtration systems, physical barriers such as sneeze guards, expansion of additional indoor or outdoor business space, or improvements related to onsite or offsite health screening capabilities. Improvements to residential rental property and intangible property are not eligible.
Recipients of the original PPP loan program who have not already applied for forgiveness may spend proceeds on these new categories of expenses as well as borrowers in the second-round loan program.
Eligible non-payroll costs, including the newly added expenses, remain limited to 40% of the totals costs eligible for forgiveness.
Other Changes to the Existing PPP Program
In addition to the simplified application process for loans under $150,000 and the new eligible expenses for borrowers who have not yet applied for forgiveness, the Act also includes the following changes:
- The original PPP loan program is reopened for those who have not already taken a loan and $35 billion of funds are set aside for such loans.
- PPP loan recipients who received an advance under the EIDL program will no longer have to reduce the forgiveness of their PPP loan by this amount.
- Borrowers may now designate any covered period length between 8 and 24 weeks after the date of the loan origination instead of being limited to only 8- or 24-week options.
- Advances received under the EIDL advances
New Loan Program
The Consolidated Appropriations Act authorizes a “second draw” PPP loan program for borrowers who have already received an initial loan but experienced reduced revenues during 2020. Below are the key features of the new loan program:
Eligibility for Recipients of the Original Program
- The applicant must have 300 or fewer employees,
- The applicant must have used or be expected to use the full amount of the first PPP loan.
- The applicant must have a 25% decline in gross revenues in any 2020 quarter compared to the same quarter in 2019.
- Eligibility is expanded to include certain business leagues and “destination marketing organizations” who have 300 or fewer employees and do not receive more than 15% of their receipts from lobbying.
Certain First-time Borrowers are also eligible, including: businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans; sole proprietors, independent contractors, and eligible self-employed individuals; non-profits, including churches; and accommodation and food services operations (NAICS Code 72) with fewer than 300 employees per physical location
Amount of Loan Available
- For non-accommodation and food services businesses, the maximum loan amount is the lesser of $2 million or 2.5 times their average monthly payroll either in the year prior to the loan or in the prior calendar year.
- Food services and accommodation businesses (e.g. hotels and restaurants), those whose NAICS code starts with 72, are eligible for the lesser of $2 million or 3.5 times their average monthly payroll as calculated above.
Clarification of Treatment of EIDL Advances and Payment Relief for Existing SBA Loans
- The Advance received and treated as a grant under the COVID Economic Injury Disaster Loan (EIDL) Program will be tax-exempt income for federal income tax purposes.
- Additionally, the six months of payments made on behalf of borrowers by the Small Business Administration for existing SBA loans including Section 7(a) loans, Section 504 Certified Development Company Loans, and the Microloan Program will also be treated as tax-exempt income for federal income tax purposes.
Please contact us with questions regarding the changes to the Payroll Protection Program.