Small businesses received an early Christmas present from Congress over the weekend in form of a new COVID relief package which is expected to be signed by President Trump today, December 22nd. There are a number of provisions within the bill that impact both businesses and individuals, however for the purposes of this article we are focused on changes to the PPP (Paycheck Protection Program) program.
Earlier this month the IRS issued guidance in form of Revenue Procedure 2020-51 which effectively taxed PPP loan funds by establishing that expenses used to obtain loan forgiveness would not be deductible. The program, which was established by the CAREs act earlier this year in March, has been marred with inconsistencies in how the US Department of Treasury executed on it versus the intent of Congress. The CAREs act specifically addressed that PPP loan proceeds would not be taxed, and this latest bill goes further to clarify that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven.
Additionally, it clarifies that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. Welcome news by businesses and their tax advisors as they complete year-end tax planning in an already unpredictable environment.
Title III of the law is appropriately named Continuing the Paycheck Protection Program and Other Small Business Support. The provisions of Title III make significant changes to the program as it stands currently as well as provide for Second Draw Loans, additional PPP loans businesses that are eligible can apply for.
Additional expenses are now allowed and forgivable under the program in addition to payroll support, rent, utilities, and mortgage interest which include the following:
- Covered operations expenditures. Payment for any software, cloud computing, and other human resources and accounting needs.
- Covered property damage costs. Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
- Covered supplier costs. Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
- Covered worker protection expenditure. Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent State and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration.
- The purchase, maintenance, or renovation of assets that create or expand a drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an indoor, outdoor, or combined commercial real property; an onsite or offsite health screening capability; or other assets relating to the compliance with the requirements of certain protective guidance
Borrowers will still have to spend at least 60% of their funds on payroll to be eligible for loan forgiveness.
Those borrowers who have already applied for forgiveness will not be able to benefit from the expanded costs associated with forgiveness as well as other changes in the program covered in this article including a new option for covered periods.
Borrowers are now able to elect a covered period ending at the point of the borrower’s choosing between 8 and 24 weeks, allowing them to stop tracking FTE’s and other required documentation at that point of time.
The bill also clarifies that other employer-provided group insurance benefits can be included in payroll costs. This includes group life, disability, vision, or dental insurance. This provision will apply to loans made before, on, or after the date of enactment of the bill.
The bill also creates for a simplified forgiveness application process for loans under $150,000, where borrowers will only be required to submit a one page form seeking the amount of forgiveness and not subjecting those borrowers to otherwise required reductions in forgiveness amounts resulting from FTE reductions or salary and hourly wage reductions. The SBA has 24 days from the passage of the bill to establish this form.
Second Draw Loans
The PPP is expanded to create a second loan program for smaller and harder-hit businesses, with a maximum amount of $2 million. In order to receive a PPP second draw eligible entities must:
- Employ not more than 300 employees;
- Have used or will use the full amount of their first PPP; and
- Demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Provides applicable timelines for businesses that were not in operation in Q1, Q2, Q3, and Q4 of 2019. Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.
Certain industries assigned to NAICS code 72, Accomodations and Food Services will be permitted to borrow 3.5 times average monthly payroll versus the 2.5 originally available to them. An eligible entity may only receive one PPP second draw loan.
The SBA has 10 days from the passage of the bill to establish a process for second draw loans.
Eligible entities must be businesses, certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.
Under this bill, 501(c)(6) and Destination Marketing Organizations (DMO) meeting certain criteria are now eligible for funding under the PPP loan program. In order to qualify, the organizations must satisfy the following criteria:
501(c)(6) Organizations:
- The organization has 300 or fewer employees;
- The organization does not receive more than 15 percent of receipts from lobbying;
- The organization’s lobbying activities do not comprise more than 15 percent of its total activities; and
- The total cost of lobbying activities is $1,000,000 or less during the most recent tax year that ended before February 15, 2020.
Destination Marketing Organizations:
- The organization has 300 or fewer employees;
- The organization does not receive more than 15 percent of receipts from lobbying;
- The organization’s lobbying activities do not comprise more than 15 percent of its total activities; and
- The DMO is registered as a 501(c) organization, a quasigovernment entity, or a political subdivision of a state or local government.
Eligibility was not extended to any organization or sports league whose primary purpose is to promote or participate in political campaigns or other political activities.
PPP borrowers will also be able to claim the Employee Retention Credit, however any wages for which a credit is computed will not be treated as forgivable payroll costs. The credit is also extended through July 1, 2021 and has been greatly expanded to equal 70% of qualified employee wages which increased from $10,000 in total per employee to $10,000 per quarter per employee. In order to qualify an entity would need a 20% drop in quarter-over-quarter revenues.
Expanded SBA Debt Programs
The bill provides for $15 billion in funding through the SBA to make grants to shuttered venue operators such as live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, or talent representatives who demonstrate a 25% reduction in revenues. The SBA may make an initial grant of up to $10 million dollars to an eligible entity and a supplemental grant that is equal to 50% of the initial grant. The grants must be used for payroll cost, rent, utilities, and personal protective equipment.
Additionally, the debt relief program in the CARES act has been resumed on small business loans guaranteed by the SBA under the 7(a), 504, and Microloan programs. All borrowers with such loans will receive an additional three months of principal and interest payments starting in February 2021. Going forward, those payments will be capped at $9,000 per borrower per month. After the three month period, certain hardest-hit by the pandemic borrowers will receive an additional five months of payments.
How Can VonLehman Help?
VonLehman has established a process where we will assist businesses in filling out their loan forgiveness application and gathering the necessary information to submit to their lenders. We will be utilizing anonline platform to facilitate this process, which will produce a completed loan forgiveness application. If you are interested in this service please contact us at info@vlcpa.com.
VonLehman experts have compiled a COVID-19 Resource Center at vlcpa.com, Here, you can find numerous resources, specific to your industry, to help you navigate these difficult times. For any questions related to this article, contact Emir Hodzic at ehodzic@vlcpa.com or 800.887.0437.
