The Bill includes roughly $900 billion in new COVID economic relief. The legislation also provides for over $300 billion for support of small businesses, including additional funding for the Paycheck Protection Program and Economic Injury Disaster Loans advances (grants).
What Does the New Stimulus Bill Include with Respect to the PPP?
Approximately $284 billion has been set aside for small businesses with a focus on small companies that have been significantly affected by the pandemic. The new legislation contains a second round of PPP funding. This is primarily for borrowers that have exhausted their first round of funds and can still demonstrate economic hardship, also know as “PPP2”. In addition, first-time PPP borrowers who did not initially apply, or those who returned a portion of their original PPP loan amount can also apply.
The new Bill also changes loan eligibility requirements. First, entities with 300 (as opposed to 500) or less employees and those who can demonstrate a 25% or higher revenue loss in at least one quarter in 2020 as compared to the corresponding quarter of 2019. Applicants will most likely provide similar certifications and documentation as in round one. This would include such things as certifying to the uncertainty of current economic conditions necessitating the loan request (the “economic necessity” certification). A new provision of PPP2 expands non-payroll expenses eligible for forgiveness, such as personal protective equipment for employees and other expenses that may have been incurred to keep a business open and operating safely, including “covered operations expenditures,” “covered property damage costs,” and “covered supplier costs.” New loans will be limited to a maximum of $2 million instead of the $10 million under the original PPP. Lastly, the Bill further limits who can receive PPP monies. The legislation prohibits companies with more than 20% Hong Kong and/or China-based ownership, as well as publicly traded companies, from obtaining new or additional PPP loans.
Otherwise, PPP2 looks pretty much the same as to what was rolled in the original PPP bill. One major change is exception for entities under the North American Industry Classification System (“NAICS”) codes beginning with 72; they can apply using 3½ months of either 2019 or 2020 monthly average payroll costs.
As with the initial PPP loans, it is expected that the Small Business Administration (“SBA”) and U.S. Treasury will issue a loan application(s), along with additional guidance thereon in the form of Interim Final Rules (IFRs) and Frequently Asked Questions (FAQs). The Bill requires the SBA to establish regulations implementing PPP2 and other small-business relief programs “no later than 10 days” after enactment.
It is important to note that all the new provisions are effective retroactively to the enactment date of the CARES Act in March 2020 and can be applied to forgiveness applications not yet submitted. This new legislation expands the definition of “covered period”, at the election of the borrower, beginning on the date of the loan origination and ending no sooner than 8-weeks and not longer than 24-weeks.
Congress Overrules IRS’s Position on Deductibility of Forgiven/Forgivable PPP Loan Expenses
A key provision is that Bill is Congress effectively overruled the Internal Revenue Service’s (IRS) previous guidance regarding the deductibility of the expenses covered. Under the IRS guidance issued in November 2020, expenses would not be deductible as long as the PPP loan was forgiven or the borrower had a “reasonable expectation” that it would be forgiven, which would have resulted in significant unanticipated taxable income for certain borrowers in the tax year these expenses were incurred.
The new legislation essentially codifies Congress’ original intent and clarifies that:
- expenses paid with the forgiven/forgivable portion of PPP loans are deductible;
- the forgiven portion of the PPP loans is not taxable for federal income tax purposes; and
- outside basis is provided for S-Corporation owners and partners in partnerships with respect to distributions emanating from PPP loan proceeds.
Be careful, different States may not treat PPP loan forgiveness and expenses consistent with this law.
Simplified Forgiveness Process for Loans Not More Than $150,000
The bill contains provision for simplification of the forgiveness process for loan amounts of $150,000 or less; this was commonly referred to as “automatic forgiveness.” Specifically, a borrower shall receive forgiveness if a borrower signs and submits to its lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA has 24 days from the date of enactment of the Bill to create the simplified application and may not require additional materials unless necessary to satisfy relevant statutory or regulatory requirements. Borrowers are still required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud. The simplified process will apply to original and new loans, so long as they are separate loans below the threshold amount.
Expanded Eligibility for Internal Revenue Code (IRC) Section 501(c)6 organizations and Housing Cooperatives
Access to PPP2 has been expanded to include other typically not for profit entities subject to IRC Sec. 501(c)(6) business leagues, provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. Their lobbying activities must limited and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.
PPP2 will also permit first-time borrowers from the following groups who did not apply for PPP loans as part of the original program:
- Entities with 500 or fewer employees that are eligible for other SBA 7(a) loans
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches
- Accommodation and food services operations (those with NAICS codes beginning with 72) with not more than 300 employees per physical location. Just as with the original PPP, affiliation rules have been waived for these entities
Temporary Full Deduction for Business Meals
Commencing in 2021 and through 2022, entities can deduct 100% of business meal expenses (previously 50% allowed) as long as such meals are provided by a restaurant.
Economic Injury Disaster Loan Grants
The legislation put $20 billion into Economic Injury Disaster Loan (EIDL) program. The language in the text also clears up some of the issues for borrowers who took out both EIDL and PPP loans.
Under the original CARES Act, the Borrower was required to pay back any EIDL advances ($1,000 per employee up to $10,000) if they also received a PPP loan. This requirement has been repealed. Borrowers will no longer be required to deduct the amount of EIDL grants from the forgivable PPP loan amount. It remains unclear how the SBA will handle those case where the entities that have applied for PPP loan forgiveness and deducted their EIDL grants from the forgiveness amount. The Bill also adds the same tax provisions for these EIDL grants as for the forgiven PPP loan.
The new Bill also provides for additional Targeted EIDL Advances (grants), and Grants for Shuttered Venue Operators, subject to certain eligibility requirements.
Extended and Expanded Employee Retention Tax Credit
The Employee Retention Tax Credit (ERC) was extended to June 30, 2021, and its benefits were increased effective for quarters ending after December 31, 2020. The credit amount has been increased from 50% to 70%, with the employee wage limitation of $10,000 per employee now applicable on a quarterly basis. To be eligible, entities must have suffered at least a 20% (down from 50% in the CARES Act) reduction in gross receipts in the calendar quarter, as compared to the same calendar quarter in 2019. The Bill makes it easier for larger employers with up to 500 employees to claim ERC benefits and makes the ERC credit available to certain governmental employers.
One of the most significant changes is entities with a PPP loan may now benefit from the ERC, however, wages included in the ERC are not forgivable PPP loan expenses. This provision is retroactive to the date of the enactment of the CARES Act.
Paid Sick and Family Leave Credits
The new Bill extends the refundable payroll tax credits of the Families First Corona Relief Act (FFCRA) for paid sick and family leave to March 31, 2021
This is based on an article from MBAF