As a unique and challenging year comes to an end, AZ believes there is no better time to share good news! This will no doubt have a positive effect on our clients that have been affected by COVID-19. Late last night, Congress passed the Consolidated Appropriations Act, 2021. This bill has a multitude of provisions regarding the Paycheck Protection Program (PPP) loans that we will summarize below.
We know many have spent countless hours planning for the tax implications of receiving a PPP loan. The Act provides necessary clarity for the most anticipated issue – business expenses paid for with the proceeds of PPP loans will be tax-deductible (including any PPP round two expenditures).
Let us continue with the good news. EIDL grants will now no longer impact PPP forgiveness! Plus, the bill includes another round of grants if you did not obtain one earlier.
Information on PPP2
A second round of PPP loans are upon us (PPP2), to the tune of $284 billion, and available to first-time qualified borrowers as well as certain businesses that previously received a PPP loan. The second round expands eligible entities to now include 501(c)(6) non-profit organizations. A key provision for 501(c)(6) entities is that their eligibility is subject to a lobbying threshold. If the entity has more than 15% of receipts or $1 million from lobbying activities, they are not eligible for a PPP loan.
To be eligible to apply for a second PPP loan, an entity must have 300 or fewer employees and have incurred a 25% decrease in gross receipts in any quarter of 2020 compared to the same quarter in 2019. It is important to note as you begin the assessment process, previous EIDL grants and PPP loans should not be included in your 2020 gross receipts amount. Comparison periods differ for borrowers who were not in operation the entire year of 2019. If a borrower was in operation during the third and/or fourth quarters of 2019, they will compare any quarter of 2020 to the third or fourth quarter of 2019 to determine if they are eligible. If a borrower was not in operation during 2019, eligibility will be determined by comparing the first quarter of 2020 to either the second, third, or fourth quarter of 2020.
Eligible first time PPP loan borrowing groups include businesses that are also eligible for other SBA 7(a) loans with 500 or fewer employees, sole proprietors, independent contractors, certain self-employed individuals, not-for-profits (including churches), and accommodation and food service operations.
Clarification was also provided that entities not in operation on February 15, 2020 or received a shuttered venue operator grant are not eligible for a PPP2 loan.
The maximum loan amount is $2 million and calculated as 2.5 times the average monthly payroll costs in the year prior to the loan or the calendar year (same as round one) with a few differences. Farmers and ranchers can use gross income instead of net income when determining loan amounts and hotel or restaurant businesses can calculate their loan amounts at 3.5 times the average monthly payroll costs.
There is an expansion in eligible expenses for PPP2. PPP2 includes all eligible costs from round one, with a few additions. You can now include covered worker protection expenditures and property damage costs not already covered by insurance. Worker protection expenditures include facility modification costs and other personal protective equipment in order to comply with COVID-19 federal and state health and safety guidelines. You can also include supplier costs that are essential to the borrower’s current operations and software or cloud computing services. The 60% payroll expenditures threshold still applies to PPP2.
Simplified Loan Forgiveness
Last but certainly not least, there is now simplified forgiveness for loans $150,000 or less. The new application for forgiveness form for this size of PPP loan will be one page long and include a certification that the borrower complied with the PPP requirements. It will also require a description of the number of employees the borrower was able to retain with the PPP loan, the amount of the loan spent on eligible payroll costs, and the value of the loan. Borrowers must retain relevant records to support their forgiveness application for a period of 4 years following submission of the form with respect to employment records and a period of 3 years for all other records. To emphasize the importance of this, there is funding included in the new bill to provide the SBA the ability to randomly select and review loans of $150,000 or less for compliance. Maintaining your documentation is key!
Please begin the self-assessment process if you believe you qualify for a PPP2 loan, including a second draw. The SBA will determine what information will need to be included to support the revenue decrease requirement. We believe you can start evaluating and putting together supporting documentation now.
Please contact Anderson ZurMuehlen to assist with this process and any other year-end planning related to PPP loans.