The Act in its current form was signed into law by President Trump on Dec. 27, 2020.
Congress passed the Consolidated Appropriations Act (Act) on Dec. 21, 2020; the act is currently pending signage from the President to become law. The Act provides additional COVID-19 relief to both individuals and businesses. This article focuses solely on the Paycheck Protection Program (PPP) loan provisions. The Act covers a wide swath of provisions – from clarifying the tax treatment of expenses tied to PPP forgiveness to new opportunities for additional PPP funds.
The purpose of this DHG Alert is to provide a summary of some of the more significant provisions of the Act that are associated with the PPP:
- Deductibility of covered period expenses: Clarification that "no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income" of any amount of the PPP loan that is forgiven and excluded from gross income.
- Qualifying expenses for loan forgiveness: Expenses paid or incurred during the covered period that are included in the loan forgiveness application for purposes of determining the amount eligible for forgiveness are expanded to include covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures. These additional expenses would only apply to loans for which forgiveness is granted after enactment of the Act.
- Covered period: The covered period begins on the date of the origination of loans (rather than the date the borrower receives the funds) and ends on the date at the election of the borrower that is no earlier than eight weeks and no longer than 24 weeks after the disbursement date. The covered period is also prorated for purposes of employees' salaries of $100,000 on an annualized basis based on the length during which the compensation is paid or incurred.
- Simplified loan forgiveness application: PPP loan recipients with loans of up to $150,000 may receive forgiveness through the utilization of a one-page form that will be developed by the Small Business Administration (SBA) after the bill becomes law.
- Group insurance payments as payroll costs: Insurance costs includable as payroll costs are clarified to include group life, disability, vision and dental insurance benefit expenses.
- Request for an increase of loan: The Act would allow loan recipients to request a subsequent increase to their loan amount for any amount previously returned by the recipient or because of any interim final rule that would give rise to an increase in covered loan amount irrespective to the fact the full loan amount has previously been disbursed or if Form 1502 has already been submitted to the SBA.
- Maximum loan amount for farmers and ranchers: The Act provides a specific loan calculation for farmers and ranchers that report income and loss on a Schedule F that were in business as of Feb. 15, 2020, and allows for lenders to recalculate loans for these borrowers if it would result in a larger loan if the loan has not been previously forgiven.
- Definition of a seasonal employer: An entity will meet this definition if it operates for no more than seven months in a year or earns no more than one-third of its receipts during any six-month period in the prior calendar year.
- Expanded eligibility for certain 501(c)(6) organizations: A 501(c)(6) organization would be eligible to receive a PPP loan if the organization receives no more than 15 percent of its gross receipts from lobbying, no more than 15 percent of the organization's activities are for lobbying, did not spend more than $1,000,000 on lobbying activities during the most recent tax year that ended prior to Feb. 15, 2020, and does not employ more than 300 employees.
- Economic Injury Disaster Loan (EIDL) Advance Reduction of PPP Loan: The Act repeals the requirement that the PPP borrower reduce their potential forgiveness amount by any EIDL Advance received.
Also included in the Act is the opportunity for certain entities that received an initial PPP loan to obtain a second PPP loan, as summarized below:
- Eligible entity: Eligible entities would include business concerns, certain nonprofit organizations, housing cooperatives, veterans' organizations, tribal business concerns, eligible self-employed individuals, sole proprietors, independent contractors or small agricultural cooperatives. Some exceptions apply:
- The eligible entity must:
- Employ 300 or fewer employees;
- Have seen a reduction in gross receipts in Q1, Q2 or Q3, or if applying after Jan. 1, 2021, Q4 of 25 percent or more when compared to the same quarter in 2019. Additional rules are provided for those business concerns that were not in business during some or all of 2019; and,
- Have received and either have fully used or will fully use the loan proceeds from a first PPP loan.
- Maximum loan amount: Generally, the loan amount would be determined by taking the lesser of:
- 2.5 times the average monthly payroll costs based on the one year prior to the loan or 2019 calendar year; or,
- Seasonal employers: Like with the first PPP loan, special rules are provided to help a seasonal employer determine how to calculate their maximum loan. The rules indicate that the seasonal employer take the lesser of:
- 2.5 times the average monthly payroll costs for any 12-week period between Feb. 15, 2019, and Feb. 15, 2020; or,
- New entities: For entities that did not exist for the full one-year period before Feb. 15, 2020, the entity is instructed to calculate the maximum loan amount by taking the lesser of:
- Total payroll costs paid or incurred as of the date of the application divided by the number of months during which these costs were paid or incurred, which is then multiplied by 2.5; or,
- NAICS 72 entities (Accommodation and Food Services): Entities that are assigned a 72 NAICS code may substitute 2.5 times for 3.5 times in the maximum loan calculation formula.
- Multiple physical locations: The Act would limit the number of employees per physical location to no more than 300.
- Waiver of affiliation rules: The Act would continue to apply the waiver available in the first round of PPP loans to the second round of PPP loans.
- Number of loans limited: An eligible entity may not receive more than one loan.
- Set asides: There are various amounts set aside that provide for at least a minimum amount of loans to be made available to certain types of eligible entities.
- Exemption and safe harbors for reduction in full-time equivalent (FTE) employees, reduction in the salary of an employee and employee availability: Moves the date under which these exemptions and safe harbor tests are calculated to a future date to be agreed upon by the SBA and U.S. Department of the Treasury (Treasury).
With the Act providing multiple possibilities for eligible entities to apply for additional PPP loan proceeds, the following are situations that may qualify for an increase to the original PPP loan or a second PPP loan:
- Borrowers that are eligible for the first PPP loan but have not previously applied.
- Borrowers that returned some or all of the PPP loan.
- Borrowers whose maximum loan application amount would increase based upon subsequently issued interim final rules.
- For example, borrowers that are taxed as partnership with guaranteed payments made to partners that did not include these payments on the original loan application.
- Borrowers that received a first PPP loan, meet the eligibility requirements of the second PPP loan program and have or will spend all the proceeds from their first PPP loan before disbursement of the second PPP loan.
- Farmers or ranchers that report income and expense on Schedule F and were in business as of Feb. 15, 2020.
The effective date for these provisions would generally be the date of the enactment of the Act and would apply to loans made on or after enactment of the Act unless specifically indicated to apply at a different time.
For questions or additional information about the PPP loan program and other guidance issued by Treasury and the SBA, please contact us at CARESActQuestions@dhg.com.