The President has signed into law the $900 billion Consolidated Appropriations Act, 2021 (CAA). It provides one-time relief payments to adults and children, adds to extended weekly unemployment benefits, and provides aid for small businesses with new Paycheck Protection Program (PPP) funding, along with a number of other targeted relief programs. It also addresses the disputed tax deductibility of business expenses paid with forgiven loans. The new law will be subject to clarification with regulations and SBA guidance, but this is our current understanding of some of the key provisions at this time.
The new round of forgivable loans, referred to as PPP2, is similar to the first round of PPP loans but with several important differences. Note that, like the PPP loans, the PPP2 loans will require borrowers to certify their uncertain economic conditions and that the loan is necessary to support ongoing operations.
PPP2 loans will be available to first-time qualified borrowers and to businesses that previously received a PPP loan. Previous PPP recipients with 300 or fewer employees (it is not clear at this time how this will be defined) may apply for another loan of up to $2 million, provided they have used or will use the full amount of their first PPP loan and can show a 25% gross revenue decline in any 2020 calendar quarter compared with the same quarter in 2019.
First-time borrowers from the following groups will also be eligible for PPP2 loans:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Certain nonprofits, including religious organizations.
- Accommodation and food services operations (those with North American Industry Classification System, or NAICS, codes starting with 72) with fewer than 300 employees per physical location.
- Most Sec. 501(c)(6) organizations including chambers of commerce and visitors’ bureaus, provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.
PPP2 Loan Terms
PPP2 borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs for 2019 or the one-year period before the loan is made, up to $2 million. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, subject to a $2 million maximum.
To be eligible for full loan forgiveness, PPP2 borrowers must spend at least 60% of the funds on payroll over a covered period of either eight or up to 24 weeks.
PPP2 loan recipients and those who received PPP loans but have not had their loans forgiven may use their loan funds to cover the following business costs and be eligible for loan forgiveness:
- Payroll, rent, covered mortgage interest, and utilities.
- Expenditures for covered worker protection and facility modification, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines (new).
- Expenditures to suppliers that are essential to the recipient’s current operations at the time of purchase (new).
- Covered property damage costs (new).
- Covered operating costs such as software and cloud computing services and accounting needs (new).
PPP Expenses Deductibility
The bill specifies that business expenses paid with forgiven PPP loans are tax-deductible. This supersedes IRS guidance that such expenses could not be deducted and brings the policy in line with what WBL, AICPA and hundreds of other business associations have argued was Congress’ intent when it created the original PPP as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This provision applies to the original PPP and subsequent PPP loans.
The new COVID-19 relief bill includes a requirement for the SBA to create a simplified forgiveness application process for loans of $150,000 or less within 24 days of the bill’s enactment. To apply for forgiveness, the borrower signs and submits to the lender a one-page certification that includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years.
The CAA retroactively repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount. It also includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
Additional provisions of the CAA:
- Individuals earning up to $75,000 per year will receive one-time economic impact payments of $600 (married couples making up to $150,000 will receive $1,200). Adults with dependent children will receive an additional $600 per child.
- Workers receiving unemployment benefits will receive an additional $300 per week from December 26 until March 14, 2021.
- The Pandemic Unemployment Assistance (PUA) program, benefitting self-employed workers, will be expanded. The Pandemic Emergency Unemployment Compensation (PEUC) program also will be expanded, providing additional weeks of federally funded unemployment benefits to those who have exhausted their state benefits.
- The bill also extends the employee retention tax credit at a higher amount. The employee retention credit will now be available if the qualifications are met even if a PPP loan is obtained, as long as the credit is not used for expenses covered by the PPP loan.
- Business meals paid or incurred in 2021 and 2022 will be 100% deductible (rather than the current 50%) as long as the expense is for food and beverages provided by a restaurant.
- The bill includes some “tax extenders.” These are generally extensions of existing tax rules that are scheduled to expire at the end of a calendar year. Among them, the CAA permanently extends the provision that allows a deduction for medical expenses that exceed 7.5% of adjusted gross income (rather than 10%) and extends through 2025 (with modifications) the exclusion of debt relief income related to a principal residence. Also, the above-the-line deduction for qualified tuition expenses was not extended and therefore expires after 2020.
Your WBL tax and business advisors are here to help you understand and take advantage of any COVID-19-related government relief for which you or your business may be eligible. Please contact us today if you have any questions.