The Consolidated Appropriations Act, 2021 (the Act) enhances and expands many provisions related to Paycheck Protection Program (PPP) Loans. Here is a review of the most significant changes.
Expenses Used for Loan Forgiveness
As expected, the Act makes clear that expenses used for the forgiveness of Paycheck Protection Program (PPP) loans are deductible and the forgiveness of indebtedness remains nontaxable. For partnerships and S corporations, the amounts are treated as tax-exempt income and thus, to the extent of the deductible expenses, increase a partner’s or shareholder’s basis. Taxpayers should adjust estimated tax payments to reflect this change in law. These changes apply to both existing and new PPP loans.
Second Draws of PPP Loans
Borrowers with fewer than 300 employees who received a PPP loan last year that have used or intend to use their current loan for allowable PPP loan expenses can apply for a second loan if gross receipts in any one quarter of 2020 were at least 25 percent less than during the same quarter of 2019. Special rules apply if the organization was not in business in some of those quarters. However, borrowers must have been in business on February 15, 2020. The new loan application (Form 2483-SD) must be submitted by March 31, 2021, with the same financial institution as the first loan application.
In counting the 300 employees, the rule allows entities operating in the hospitality industry to count employees by geographic location. Certain industries, notably in manufacturing, may use higher employee counts, depending on their NAICS code. The affiliation rules applicable in determining numbers of employees continue to apply to second draw borrowers.
This new program is also available to certain section 501(c)(6) organizations, news organizations (e.g., newspapers, broadcasters and radio stations) with no more than 500 employees per physical location, destination marketing organizations, and cooperatives. These loans are not available to shuttered venues (e.g., theaters, concert halls, museums, movie theaters) that receive a grant available to such entities or to publicly traded entities. In addition, second draw loans are not available to public companies, businesses engaged in political or lobbying activities, or businesses organized or with significant operations in China or Hong Kong, or to businesses with board members residing in China.
The eligible loan amount will be 2.5 times a borrower’s average monthly payroll costs (3.5 times for borrowers in the hospitality industry, i.e., NAICS code starting with 72) in the year prior to the loan or 2019, up to $2 million. The forgiveness provisions relevant to the first draw loans will be applied in determining second draw loan forgiveness.
Calculation of Forgiveness Amounts
For loans that have not yet been forgiven and second draw loans, the expenses that can be used for loan forgiveness are expanded to include the following:
- Payments for software or cloud computing services that are used to facilitate business operations such as payroll, accounting functions, human resources, sales and billing functions, etc.
- Property damage costs due to 2020 public disturbances that were not covered by insurance
- Supplier costs that are essential to the borrower’s operations and were obligated under contracts or purchase orders in place prior to loan disbursement (more flexible rules apply to purchases of perishable supplies)
- Expenditures for worker protection (e.g., masks and other personal protection equipment, construction of physical barriers, air filter systems, or expansion of additional indoor, outdoor, or combined business space, etc.)
In addition, fringe benefits that can be counted as payroll costs for loan forgiveness are expanded to include disability insurance and group term life insurance costs. Economic Injury Disaster Loan (EIDL) advances will no longer reduce a borrower’s forgiveness amount and the SBA will issue rules that ensures borrowers whose forgiveness was reduced for their EIDL are reimbursed.
Under prior law and guidance, borrowers who elected a 24 week covered period could apply for forgiveness earlier than 24 weeks, but the calculation of full-time equivalents had to be for a full 24-week period, and salary or hourly wage reduction amounts had to include the total period, irrespective of when the forgiveness application was filed. Congress is now allowing a borrower to define the covered period as ending on any date between 8 and 24 weeks. This allows borrowers more flexibility in calculating full-time equivalents and required salary or hourly wage reduction amounts.
However, if a shorter period is used, the maximum annual wage limitation of $100,000 is decreased to reflect the shorter period. For example, if a 15-week covered period is used, the maximum compensation for a non-owner employee would be $28,846. Special calculation rules also apply to farmers and ranchers.
Simplified Forgiveness Applications for Loans of Not More Than $150,000
Within 24 days after enactment, the SBA is required to release a one-page simplified certification form on which a borrower is required to provide the following information:
- Description of the number of employees able to be retained because of the loan
- Estimated amount of the covered loan spent on payroll costs
- Total loan amount
We expect more simplified documentation requirements, but exact requirements are not known at this time. The certification must be attested to as accurate and the borrower needs to attest that they have complied with the loan requirements. Employment records are required to be maintained for four years after the forgiveness application is submitted. Records of other expenses used for loan forgiveness only need to be retained for three years following the loan submission. The law specifically provides that these loans can still be audited and adjusted for fraud, ineligibility and other material noncompliance. This new simplified forgiveness application applies to loans made before, on or after the date of enactment.
Additional Amounts for Existing Loans
Borrowers who returned all or part of their PPP loan will be able to reapply, under guidance to be issued to lenders by January 13, 2021. Borrowers with seasonal businesses who used annual rather than seasonal wages for determining average monthly salary and whose banks refused loan increases will not be able to access additional funds.
A seasonal business is defined as one that operates no more than seven months a year or earns no more than a third of its receipts in any six months in the prior calendar year. In addition, farmers and ranchers have special rules for calculating the maximum loan amount, except to the extent a loan has already been forgiven.
SBA Audits of PPP Loans
Congress is directing the SBA to submit an audit plan detailing its policies and procedures for conducting forgiveness reviews and audits and the metrics used to determine which loans will be audited by February 11, 2021. By March 13, 2021, the SBA will need to begin monthly reports to Congress regarding the number of active reviews and audits of PPP loans, the number of such reviews that have been going on for more than 60 days and any substantial changes to the audit plan previously submitted. These releases will enable borrowers to better understand the audit process.
Grants for Shuttered Venues
Grants rather than loans are available to shuttered venues that experienced a decline in gross receipts of at least 25% between a calendar quarter in 2020 and the same quarter in 2019 and are open or intend to reopen. These venues include live venue operators or promoters, theatrical producers, live performing arts organization operators, certain museum operators, motion picture theater operators or talent representatives that were operating on February 29, 2020. Grants are awarded during specified priority periods and are based on revenue rather than payroll, with certain amounts set aside for small employers. These grants can be used for expenses, which would qualify for PPP loan forgiveness, during the period March 1, 2020, through December 31, 2021.
Taking advantage of these expanded and enhanced PPP Loan opportunities can result in significant cash benefits. Be sure to consult with our professionals to identify and correctly apply these provisions to your operations. Cherry Bekaert is ready to answer questions and guide you through the process.
