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PPP Loans: The Sequel is Better!

Estimated reading time: 12 minutes

Ever notice that sometimes the sequel is better than the original release? The second paycheck protection program, or PPP-2 not only provides for a second round of forgivable SBA loans to small businesses, but it also cleans up some issues from the original PPP contained in the CARES act.

The president signed the Economic Aid Act, a $900 billion stimulus act, into law on December 27, 2020. Contained within the Economic Aid Act, PPP-2 authorizes $325 billion in relief for small businesses in the form of forgivable loans from the Small Business Administration, or SBA.

An important thing to note here is that obviously this article is general in nature. I am not offering specific advice to you or your company. You should always discuss these matters with your company’s accounting, financial and legal advisors. If I can be of assistance, or if you have any questions, criticisms or suggestions, please contact me. I’m always happy to help.

Release of Interim Final Rules (IFRs)

Late last night (January 6, 2021), the SBA released interim final rules implementing the Economic Aid Act:

Also, the IRS issued revenue ruling 2021-2 which confirming the tax implications of PPP loan forgiveness and the deductibility of expenses paid with the proceeds of PPP loans that are forgiven.

Significant changes from the original version of this article will appear in red text. The changes reflected in today’s update (January 7) are the highlights based on a preliminary review, and additional details will be added over the coming days.

Instead of updating all of the blog posts when new information becomes available, I’ve created a Guide to Recovery Resources for up-to-date information on the PPP, the Employee Retention Credit and the Shuttered Venue Operators Grant program, all in one place.

If you are interested in this topic, my suggestion is that you consider subscribing to my updates. It is free, and I promise I will respect your privacy and not sell or otherwise share your contact information without your consent.

Clean-up of CARES Act

When Congress passes a major program, like the CARES act, it lays out the game. However, the detailed regulations are defined by the federal bureaucracy: the Treasury Department, the Internal Revenue Service and the Small Business Administration among others. The regulations are usually drafted to try to be consistent with other regulations which in many cases is what Congress intends. In the case of the CARES act, however, the intent was to provide relief and support for businesses. A significant impact of the Economic Aid Act clarifies the intent of Congress for the regulators. Accordingly, guidance and regulations for the original PPP program are being revised.

Tax Implications of PPP Loan Forgiveness

The general rule is that loan amounts forgiven are included in taxable income. The Economic Aid Act provides that taxable gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision is effective as of the date of the CARES act. Therefore, loan forgiveness of either original PPP loans or PPP-2 loans does not result in taxable income. This is an important clarification. To implement this provision, the IRS has issued Rev. Ruling #2021-2. See above.

Deductibility of Expenses

Previous guidance was that expenses paid with the proceeds of PPP loans that were forgiven were not deductible for federal income tax purposes. The Economic Aid Act provides that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven. This provision is also effective as of the date of the CARES act. Accordingly, expenses that would otherwise be deductible remain deductible whether or not they were paid from the proceeds of either an original PPP loan or a PPP-2 loan that is forgiven. To implement this provision, the IRS has issued Rev. Ruling #2021-2. See above. Another huge win for small businesses.

Repeal EIDL Advance deduction from PPP forgiveness

An EIDL Advance was a grant program offered together with the economic injury disaster loan, or EIDL program. Under previous guidance, amounts received as an EIDL Advance were deducted from the amount of a PPP loan that could be forgiven. For example, if a company received a $10,000 EIDL Advance and a $100,000 PPP loan, then only $90,000 of the PPP loan could be forgiven and the remaining $10,000 would have to be repaid. The result was an unpleasant surprise for borrowers under the PPP program when applying for loan forgiveness.

The Economic Aid Act provides that the entire PPP loan amount remains forgivable. Again, the effective date of the provision is as of the CARES act, so it would retroactively change the forgivable amounts of original PPP loans. If you had an EIDL Advance and have already applied for loan forgiveness under the original PPP program then the forgivable amount of your loan should be unaffected by the EIDL Advance.

Changes to Loan Forgiveness

There are newly eligible expenses defined in the PPP-2 program that also apply to original PPP loans, unless forgiveness has already been processed. See below.

Second Draw Loans

The recent stimulus act also provides $284.5 billion for a second round of paycheck protection program loans, which I’ll refer to as PPP-2. The program is similar to the original PPP under the CARES act, but with some important differences. The first group of IFRs have recently been issued. Forms and additional guidance can be expected in the very near future. As I said above, the situation is fluid and final regulations and forms have not been issued so check back often to keep up to date. Companies who received PPP loans may be eligible for a second loan, called a second draw loan. There is also $35 billion reserved for 1st time borrowers. The last day to apply for 1st or 2nd draw PPP-2 loans is March 31, 2021.

Second Draw Eligibility

PPP-2 second draw loans are targeted for the hardest hit borrowers. There are four major requirements to be eligible:

  • The business must have been in operation on February 15, 2020.
  • Generally, 300 or fewer employees.
    • For businesses with multiple locations, not more than 300 employees per physical location.
  • A decline in gross receipts of 25% in any quarter in 2020 compared with the same quarter in 2019.
    • Loans received under EIDL or the original PPP are not included in gross receipts
    • At this point, it appears that calendar quarters are to be used, but again final regulations are pending
    • Gross receipts is defined as all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source including:
      • Sales of products or services
      • Interest and dividends
      • Rents
      • Royalties
      • Fees
      • Commissions
      • Reduced by returns and allowances
    • Comparison methods will differ for borrowers who were not in operation the entire year of 2019.
    • If forgiveness amount of a first draw PPP loan is recorded in calendar year 2020 revenue it is excluded from the gross receipts comparison.
  • The January 6 IFR provides an alternative approach to calculating the decline in gross receipts. A borrower that was in operation in all four quarters of 2019 can compare total annual receipts in 2020 to annual receipts in 2019 rather than doing a quarter-by-quarter comparison. Under this alternative approach, copies of annual tax forms substantiating the revenue decline would be submitted.
  • A borrower must certify that it has used or will use the full amount of first draw funds only for eligible expenses. This is a significant change from the guidance contained in the original article.

Ineligible Entities

The following types of organizations are ineligible for PPP-2 loans:

  • An entity that has permanently closed.
  • Entities receiving Shuttered Venue Operator Grants. These grants are provided for in the law, but are beyond the scope of this article.
  • Publicly-traded businesses
  • Lobbying organizations
  • Hedge funds or private equity funds
  • Entities affiliated with the People’s Republic of China
  • Those registered under the Foreign Agents Registration Act
  • The President, Vice President, head of an Executive department, Member of Congress or their spouse
  • Household employers
  • Entities in bankruptcy

The above list is not comprehensive, however. You should check with your accountant or legal advisors as to your company’s eligibility.

Second Draw Loan Amounts

The maximum loan amount for second draw borrowers under PPP-2 is $2 million. As a general rule, a company’s maximum loan amount is calculated at 2.5 times their average monthly payroll costs. Companies can use either their 2019 payroll amounts, or the 12-months prior to application to calculate average monthly payroll. Using 2019 could be beneficial to companies who have reduced payroll costs during 2020. Companies who have been in operation less than 12 months would use the average monthly payroll costs for the period of operation.

Restaurants, hotels and other businesses in NAICS code 72, Accommodation and Food Services, are eligible for 3.5 times their average monthly payroll costs.

Seasonal employers can look at any 12-week period from February 15, 2019 through February 15, 2020. A seasonal employer is one who operates for no more than seven months in a year or who earned no more than 1/3 of its receipts in any six months in the prior calendar year.

Second Draw Documentation

Generally, the same as documentation required for first draw PPP loans. No additional documentation to substantiate payroll costs will be required if:

  • The borrower used calendar year 2019 figures to determine its first draw and second draw loan amount and
  • The lender is the same

For loans over $150,000, documentation to support a revenue decline must be submitted with the application. Acceptable documentation would include:

  • Relevant tax forms, including annual tax forms
  • If relevant tax forms are not available, quarterly financial statements or bank statements

For loans of $150,000 or less, documentation is not submitted with the loan application but must be submitted on or before the date the borrower applies for loan forgiveness.

Second Draw Process

A borrower must submit to the lender SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form). This form is not yet available as of today (January 7, 2021). Check back for updates.

The lender will submit a request through the SBA’s website to increase the PPP loan amount, even if the loan has been fully disbursed. In addition to the $2 million second draw loan amount, in no event can the increased loan amount exceed the maximum PPP loan amount ($10 million for an individual borrower or $20 million for a corporate group).

The borrower must provide the lender with required documentation to support the calculation of the increase.

Second Draw Certifications

As part of the loan application, the borrower will be required certify:

  • It has not and will not receive another second draw
  • The borrower realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period
  • The borrower has used or will use first draw proceeds only for eligible expenses
  • It is not an ineligible entity

Covered Period

To maximize loan forgiveness, the borrowed funds have to be spent on eligible expenses during the covered period. Under PPP-2, a borrower can choose a covered period that is between 8 and 24 weeks. Under the original PPP, the covered period had to be specified as either 8 or 24 weeks, but under PPP-2 it can be any period between.

The covered period for all PPP loans is extended from December 31, 2020 to March 31, 2021.

First Draw Borrowers

As noted above, $35 billion has been set aside for first time borrowers. The maximum loan amount for first draw borrowers is the lesser of 2.5 times average monthly payroll costs and $10 million for an individual borrower. The list of eligible first draw borrowers is a bit more extensive than second draw borrowers:

Eligible First Draw Borrowers

  • Generally, businesses with 500 or fewer employees that are eligible for SBA 7(a) loans
  • Sole proprietors, independent contractors, and eligible self-employed individuals
  • Any business that averages less than 500 employees per physical location that has a NAICS code starting with 72 (accommodation and food services)
  • Nonprofits, including churches
  • 501(c)(6) and destination marketing organizations
    • 300 or fewer employees
    • Chambers of commerce, economic development, tourism
    • Subject to lobbying threshold:
      • 15% of receipts
      • 15% of activities
      • $1 million total
  • Certain news organizations
  • Housing cooperatives

Other

$25 billion has been set aside for borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas.

Farmers and ranchers who file on Schedule F can use gross income instead of net. Loans can be recalculated if it would result in a larger loan. This applies to all PPP loans unless the loan has already been forgiven.

Borrowers who returned all or part of their original loans may reapply for the difference if they have not received forgiveness.

Borrowers whose loan amount was impacted by changing guidance can modify their loan amount even if the loan has been fully disbursed.

Guidance from the SBA is expected very soon, so check back for updates to the above.

PPP Loan Forgiveness

A PPP loan (or PPP-2 loan) can be all or partially forgiven to the extent that proceeds were used to pay eligible expenses. At least 60% of the eligible expenses must be for payroll costs and the remaining 40% for eligible non-payroll costs.

Payroll Costs

Payroll costs include salaries and wages and certain benefits costs including group life, disability, vision and dental insurance.

Eligible Non-Payroll Costs

  • Mortgage interest
  • Rent
  • Utilities
  • Worker protection expenditures such as personal protection equipment and costs to comply with COVID-19 federal health and safety guidelines
  • Expenditures to a supplier that are essential to the company’s current operations
  • Operations expenditures such as software, cloud computing and other HR or accounting costs
  • Covered property damage costs related to 2020 public disturbances not covered by insurance or other compensation.

Simplified Forgiveness

There is a provision for simplified loan forgiveness for loan amounts up to $150,000. Applicants for simplified forgiveness will need to sign and submit a one-page form:

  • Attest to complying with PPP requirements
  • The Loan amount
  • The number of employees retained
  • Estimate of loan amount spent on payroll

There will also be a requirement to retain records up to four years for employment costs and three years for other. It is very important to assemble and retain good documentation.

You may be required to document a substantial loss of revenue. It is unclear at the moment what forms of documentation will be required.

Timing

The law contains deadlines for the various regulatory groups to issue forms and guidance. As noted above, IFRs were released last night (January 6, 2021). Forms and additional guidance is expected to be relased over the next few days. My best guess is that the SBA will begin accepting applications mid-January.

I hope the above is informative. I will endeavor to keep it current as guidance and forms are issued so please check back. As always, you can subscribe to be notified when updates are issued.

The Small Business Administration has a webpage dedicated to coronavirus funding options. It is a great resource for those who want to know more about SBA lending.

The IRS has also has a webpage dedicated to tax relief for businesses and tax-exempt entities.

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