As a follow-up to our communication on December 3 regarding key provisions of the Paycheck Protection Program (PPP) and loan forgiveness, we are writing to inform you of significant changes to the PPP included in the most recent Act (Consolidated Appropriations Act 2021)  signed by the President on December 27. The following is not intended to be an exhaustive list of items in the 5,000+ page document.  However, we feel the significant changes to note in relation to the PPP program are as follows.

Expenses used to support PPP Loan Forgiveness Will Be Deductible
The IRS has issued a series of Revenue Procedures and Notices that alarmed many PPP borrowers by stating that expenses paid for with forgiven loans will not be able to be deducted.  This was against Congress’s intent, and the bill clarifies their position.  The bill makes clear that PPP forgiveness is not taxable. It further makes clear that deductions are allowable for expenses paid with the proceeds of a forgiven PPP loan (additionally, tax basis and other attributes of the borrower’s assets will not be reduced). That’s retroactive to date of enactment of the CARES Act (March 27, 2020).

Eligible Entities Have a Second Chance to Receive a PPP Loan
The bill would expand the PPP program to allow some businesses to receive an additional loan. The second loan, called a “PPP second draw” loan, is targeted to smaller and harder-hit businesses. Those are businesses with 300 or fewer employees who have used or will use the full amount of their first PPP. They must demonstrate at least a 25% reduction in gross receipts in any quarter of   2020 relative to the same 2019 quarter. Generally, businesses can borrow up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, however, businesses operating in the accommodation and food service industries (NAICS code 72) can receive loans up to 3.5 times their average monthly payroll. The maximum loan amount is $2 million, and for forgiveness purposes, the 60/40 cost split between payroll and non-payroll costs will continue to apply.

EIDL Advances Do Not Need to be Repaid
The legislation states that emergency EIDL Grants and Advances, which are considered forgiven and, in most instances, do not need to be re-paid, are also not taxable to the small business borrower.  Thus, EIDL advances do not need to be deducted from PPP loan forgiveness amounts.  

Simplified Application for Loans Under $150,000
Borrowers who received less than $150,000 in PPP loans during the first round will now only have to submit a one-page application for forgiveness, but all of the same rules apply.  The signer of this application may as well sign the longer application to make sure that they have everything done right because personal liability can be enormous.  Our recommendation is that clients consult with their CPAs carefully and fill out the long application but actually submit the short application, with their answers in the long application being kept in case they are ever investigated.  

PPP Borrowers Can Select Covered Period for as Short as 8-Weeks and as Long as 24-Weeks
Borrowers are now able to choose the 8 to 24-week covered period during which the borrower is required to spend a sufficient amount on qualified expenses to receive forgiveness.  This begins the day the borrower received the funds and ends on any day selected by the borrower, but no earlier than 8-weeks from the date the loan proceeds are received and no later than 24 weeks after such date of origination. 

This change will enable borrowers to cut off the testing period before making a reduction in workforce that would cause the applicable reduction in workforce penalties to apply, as long as the workforce is at its pre-February 15 levels on the last day of the Covered Period.  

Expanded Eligibility for 501(c)(6) Organizations
Organizations that are classified as a 501(c)(6) will have expanded eligibility to PPP loans.  A 501(c)(6) is defined as follows and are now eligible for PPP loans:

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Please click here for a further breakdown of the items included in the stimulus package.