As we work our way through the several hundred pages of new legislation about to be enacted, here are the key takeaways that are noteworthy and should be of value to PPP borrowers and advisors.
I will be providing more detail in a more thorough blog post sometime tonight or early tomorrow morning.
Also, Brandon Ketron, CPA, J.D., LL.M and I will be giving a free webinar on Tuesday, December 22nd at 9:00 a.m. (EST), outlining these items and more. Email “Round 2” in the subject line to firstname.lastname@example.org for an invite to the webinar or replay.
Here are the key takeaways:
EIDL Grants Tax-Free and Will Not Reduce PPP Loan Forgiveness
This new law will provide that the non-repayable EIDL advances are tax-free, and will no longer reduce the amount of PPP loan forgiveness. That is a nice little gift that borrowers can put into their stockings.
EIDL Even More Swell
In addition, there will be a new round of EIDL loan advances to the tune of $20 billion dollars, which is pretty much as good as the second night of Hanukkah. These will go first to the people and businesses who need them the most, probably based upon $1,000 per employee and not exceeding $10,000 per borrower.
MORE FOR YOU
Saving Concert Halls and Venues
Under a new shuttered venue grant provision, concert and music facilities may receive a grant based upon 45% of gross revenue earned during 2019 calendar year, with no requirement that the monies be spent by any particular time. The Act does contain certain restrictions on the use of the funds. For example, compensation paid to anyone independent contractor or employee cannot exceed $100,000 annually, and the funds cannot be used to purchase real estate. Dedicated not for profit employees work long hours with great dedication for such halls and deserve this support.
“It is because I think so much of warm and sensitive hearts, that I would spare them from being wounded.” —Oliver Twist
Tax Treatment Corrected
As expected, expenses paid to obtain PPP loan forgiveness will be tax-deductible, and the forgiveness of the PPP loan will not be included in income. This will leave many S corporation shareholders with the inability to deduct expenses paid in 2020 because of the lack of basis in their stock, which will not be increased until forgiveness occurs in 2021. Advisors will need to get the word out that shareholders may need to contribute monies to increase basis before the new year. If you don’t understand this call your accountant before Christmas and stay tuned for future articles. Thanks sincerely to Santa for this one.
The Second Bite at the Apple for Many
The ultimate holiday gift is the second bite of the apple. For most borrowers this will require that gross receipts for a calendar quarter in 2020 were 75% or less of the corresponding quarter in 2019.
In other words, the borrower can compare January through March of 2019 to January through March of 2020, April through June of 2019 to April through June of 2019, July through September of 2019 to July through September of 2020, and October through December of 2019 to October through December of 2020, and if any one of those comparisons passes the 25% reduction test, the new PPP loan can be taken.
The Bear Necessities
Please note that the necessity requirement must still be satisfied for second bite borrowers. This means that the loan must be necessary to support the ongoing operations of the business. If the business has been profitable or at least broke even and fully expects to survive without assistance, until when the virus clears, then the loan may not be sufficiently “necessary” to justify taking it. Please see my article entitled Was Your PPP Loan ‘Necessary’? If Not, There Could Be Horrific Repercussions on this very important requirement, keeping in mind that even though the SBA has announced that it will not question necessity for loans under $2 million, other agencies may, not to mention competitors and whistleblowers (who whistle while they work).
24 Weeks to Spend What Thou Seeks
The borrower will then have 24 weeks from receipt of the second loan to spend sufficient monies on payroll, payroll taxes, and other permitted expenses in generally the same manner as applied with the first round. Except that monies spent for structural changes, PPE (Personal Protective Equipment), property damage, and certain supplier costs can also be counted. The 60% rule discussed in our article entitled PPP Breaking News: Treasury Announces Relief From 60% Cliff will still apply, with payroll costs, unemployment taxes, and the group benefits described below being included in the 60% payroll portion, and permitted interest, rent, utilities, PPE and structural costs to accommodate virus protection counting on the 40% side.
Borrow More for Group Expenses Will Cause Applications to Soar
The determination of how much can be borrowed will now include expenses paid for group life insurance, group dental insurance, group vision and group disability insurance as a payroll cost.
Borrowers will be able to now apply for 2.5 times the average monthly cost of these items as an additional advance under their original loans using an amended loan application. Borrowers who received loans in the first round will also be able to submit revised applications to request increased loan amounts if rule changes either by the SBA or this Act would allow for a higher than originally received loan amount. Better than a dreidel (spinning top and form of Hannuka gambling for some) for many of us.
No Compounded Interest Should Be of Interest
The 1% interest incurred on PPP loans will not be compounded (i.e. there will be no interest on the interest that accrues under these loans), and will not adjust if interest rates increase in the future. Every little bit helps, but there is no interest charged to borrowers who receive full forgiveness.
And I heard her exclaim as she drove out of sight, Merry PPP-mass to all, and to all a good night.
Thanks to Congress for not being Ebenezer Scrooge as Christmas approaches.
Stay tuned as we continue digging through this complicated but well thought out addition to a law that has saved hundreds of thousands of businesses that are still in need of economic support.
“It is a fair, even-handed, noble adjustment of things, that while there is infection in disease and sorrow, there is nothing in the world so irresistibly contagious as laughter and good humour.” — Charles Dickens, A Christmas Carol