After months of waiting, debate, and compromise, we finally have a second COVID-19 relief package. The deal comes just days before many of the protections established by the CARES Act are set to expire.
Some of the most anxiously awaited aspects of the new Act are the additions, clarifications, and changes to the Paycheck Protection Program. Millions have been waiting for a second round of PPP loans that were originally designed to keep businesses and professionals afloat throughout the Coronavirus crisis.
The first round of the PPP generated a number of hurdles and questions that the Coronavirus Response and Relief Supplemental Appropriations Act is now in position to remedy. It also serves as an opportunity for those who missed out on the first round of the PPP to secure funding or assuage fears they may have had about taking the loans.
Brandon Ketron CPA, J.D. LL.M., and I will be giving a free webinar outlining these items Tuesday, December 22nd at 9 AM EST, email the subject line “Round 2” to firstname.lastname@example.org for an invite.
Now that we have the official language of the Act, we will take a look at the primary changes, compare them against previous iterations of the Act, and discuss them below:
1. Forgiven PPP Loans Will Be Deductible
MORE FOR YOU
In May, the IRS issued Revenue Notice 2020-32, which alarmed many PPP borrowers because it took the position, that expenses paid for with forgiven loans would not be deductible. This was against Congress’ intent, as evidenced by the letter sent by Senators Grassley, Neal, and Wyden to Treasury Secretary Steve Mnuchin, and the new Act solidifies this position. In relevant part, the new Act states:
“(2) no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1).”
Initial reports from the Wall Street Journal indicated that at least one GOP aid had said that these deductions would be restricted in some way; however, there does not appear to be any language in the Act to suggest that this is the case.
The meaning of this language and its implications for borrowers are discussed in the blog I have posted this past weekend entitled “PPP Borrower Tax Relief Under Stimulus Bill – It’s Finally Happening.”
In addition, the new Act provides that owners of S corporations and partnerships will receive a step-up in basis attributable to the “tax-exempt income” that results from PPP loan forgiveness. Unfortunately, for most borrowers this increase in basis will not occur until the 2021 tax year when forgiveness is confirmed by the SBA. Therefore, owners wishing to have losses flow through on their personal tax returns may not have sufficient basis to take the loss in 2020 unless contributions are made to the entity prior to year-end, and the loss will remain suspended until basis is increased in 2021 after the loan is forgiven.
2. Second Draw – Eligible Recipients May Receive a Second PPP Loan
Many business owners and potential borrowers have clamored for another round of PPP funding since the closure of applications for the initial round earlier this fall. These parties will get their wish as the new Act permits both new and repeat borrowers to receive a PPP loan if they meet the requirements of an “eligible recipient.”
An “eligible recipient” is defined as “any business concern, nonprofit organization, housing cooperative, veterans organization, Tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative” that meets the following three requirements:
- Employs not more than 300 employees;
- Has or will use the full amount of their first PPP loan; and
- Had gross receipts during the first, second, third, or, only with respect to an application submitted on or after January 1, 2021, fourth quarter in 2020 that demonstrate not less than a 25 percent reduction from the gross receipts of the entity during the same quarter in 2019.
For purposes of the above 25% reduction in gross receipts test, borrowers who were not in business during the first, second, or third quarter of 2019 (January 1 – September 30), but were in business during the fourth quarter of 2019 (October 1 – December 31), can compare the first, second, or third quarter of 2020 (January 1 – September 30) to the fourth quarter of 2019.
If the entity was not in business during 2019 but was in business by February 15, 2020, then such borrower can compare their gross receipts during the second or third quarter of 2020 (April 1 – June 30) to the first quarter of 2020 (January 1 – March 30) to see if they qualify.
For purpose of the above tests, non-profit entities can compare their gross receipts in the first, second, or third quarter of 2020 to gross receipts in the same quarter of 2019.
Previous iterations of this Act that did not pass, would have required a 50 percent reduction from gross receipts, so this change to 25 percent will allow PPP loans to reach a greater number of potential borrowers.
Provided they meet the three requirements above, an “eligible recipient” will also still need to satisfy the “Necessity Test” that is discussed in my blog post dated May 4, 2020 “Was Your PPP Loan ‘Necessary’? If Not, There Could Be Horrific Repercussions.”
Some may remember that borrowers were required to certify in good faith on their initial PPP loan application that the loan is “necessary to support the on-going operations of the applicant.” Notably, this “necessity requirement” still appears to be in place following the passage of this Act. The necessity requirement is interesting because it was never fully defined, which left many borrowers wondering just how much economic harm or risk had to be inflicted upon their business before they could certify in good faith that the loan was “necessary.”
It may be hard for businesses that have survived one or two hard quarters, but are now making ends meet to honestly certify that the loan is “necessary” for the ongoing operation of the business, even though the business could reasonably argue that they need the loan. The test will present a very important issue to be carefully addressed with the borrower’s CPA, financial and legal advisors.
While the SBA has announced that it will not question the necessity certification for those whose loans did not exceed $2 million, other agencies (such as the IRS), or even whistleblowers (not to mention competitors), may. Additionally, reception of a second loan will not be kept confidential so borrowers may have to endure harsh public scrutiny.
3. Increased Maximum Amount of New PPP Loans For Seasonal Employers, New Entities, and Businesses With More Than One Physical Location
For seasonal employers, the maximum amount of new PPP loans is based upon 2.5 times the average monthly payroll costs for the 12-week that begins February 15, 2019 or March 1, 2019 and ends February 15th, 2020. The loan can be for up to, but not exceeding, $2 million.
For new entities, the maximum amount of new PPP loans is based upon at the election of the borrower the greater of
- 2.5 times the average monthly payroll costs for any one year period before the date on which the loan is made or
- the average monthly payroll costs for the 2019 calendar year multiplied by 2.5, but not exceeding $2 million in either case.
For businesses with more than one physical location, the maximum amount of new PPP loan will be as follows:
- $2,000,000 as the total amount of all covered loans; and
- in applying this paragraph, the Administrator shall substitute ‘not more than 300 employees per physical location’ for the term ‘not more than 500 employees per physical location’ in paragraph (36)(D)(iii).
4. Chinese Owned Entities Are Ineligible For a Second Draw PPP Loan
Publically traded businesses and entities affiliated with the People’s Republic of China are on the list of entities that cannot qualify for a new PPP loan. The Act reads as follows:
- (AA) for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or that has significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership; or
- (BB) that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China
Quite interestingly, China is the only restricted country included in the new Act, while other adversarial nations such as Iran, Russia, and North Korea are not.
5. Additional Loans Cannot Exceed $2,000,000 per Borrower–90 Day Wait Between Loans
The loan amounts for a vast majority of borrowers will be almost identical to what the borrower received for their original PPP loan. This second round of funding, however, is capped at $2 million per borrower rather than $10 million under the initial round of PPP loans in the CARES Act. For those few borrowers who received a PPP loan within the last 90 days, the new Act requires that the aggregate of the new and old loan will not exceed $10 million.
6. No Enforcement Action Against Banks
The proposed bill provides that there will be no “enforcement action” with respect to lenders. The Act states as follows:
‘‘(3) NO ENFORCEMENT ACTION.—With respect to a lender that relies on a certification or documentation described in paragraph (2) related to an initial or second draw PPP loan, an enforcement action may not be taken against the lender, and the lender shall not be subject to any penalties relating to loan origination or forgiveness of the initial or second draw PPP loan, if—
(A) the lender acts in good faith relating to loan origination or forgiveness of the initial or second draw PPP loan based on that reliance; and
(B) all other relevant Federal, State, local, and other statutory and regulatory requirements applicable to the lender are satisfied with respect to the initial or second draw PPP loan.’’
This Act also provides that lenders will be compensated by the Administrator of the SBA. The Act states as follows:
‘‘(L) REIMBURSEMENT FOR LOAN PROCESSING AND SERVICING.—The Administrator shall generously compensated lenders that make a covered loans—
(i) for a covered loan of not more than $50,000, in an amount equal to the lesser of—
(I) 50 percent of the balance of the financing outstanding at the time of disbursement of the covered loan; or
(ii) at a rate, based on the balance of the financing outstanding at the time of disbursement of the covered loan, of—
(I) 5 percent for a covered loan of more than $50,000 and not more than $350,000; and
(II) 3 percent for a covered loan of more than $350,000.”
7. Loans Will Now Be Permitted for Many Borrowers in Bankruptcy
In a significant change, Borrowers in bankruptcy will be able to apply for a PPP loan based on the provisions of the new Act. The Act reads as follows:
‘‘(g)(1) The court . . . may authorize a debtor in possession or a trustee that is authorized to operate the business of the debtor under section 1183, 1184, 1203, 1204, or 1304 of this title to obtain a loan under paragraph (36) or (37) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), and such loan shall be treated as a debt to the extent the loan is not forgiven in accordance with section 7A of the Small Business Act or subparagraph (J) of such paragraph (37), as applicable, with priority equal to a claim of the kind specified in subsection (c)(1) of this section.”
8. 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 borrowers consult with their CPAs or other professionals carefully and fill out the long application but actually submit the short application, with their answers in the long application being ready for review in case they are ever investigated.
The Act states as follows:
‘‘(A) IN GENERAL .—With respect to a covered loan made to an eligible recipient that
is not more than $150,000, the covered loan amount shall be forgiven under this section if the eligible recipient—
(i) signs and submits to the lender a certification, to be established by the Administrator not later than 24 days after the date of enactment of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which—
(I) shall be not more than 1 page in length; and
(II) shall only require the eligible recipient to provide—
(aa) a description of the number of employees the eligible recipient was able to retain because of the covered loan;
(bb) the estimated amount of the covered loan amount spent by the eligible recipient on payroll costs; and
(cc) the total loan value;
(ii) attests that the eligible recipient has—
(I) accurately provided the required certification; and
(II) complied with the requirements under section 7(a)(36); and
(iii) retains records relevant to the form that prove compliance with such requirements—
(I) with respect to employment records, for the 4-year period fol1lowing submission of the form; and
(II) with respect to other records, for the 3-year period following submission of the form.”
9. PPP Borrowers Can Select A Covered Period for as Short as 8-Weeks and as Long as 24-Weeks
Borrowers are now able to choose a covered period that can be as long as short as 8 weeks and as long as 24 weeks immediately after the second loan is received, during which the borrower is required to spend a sufficient amount on qualified expenses to receive forgiveness. This period thus 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 having 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. The bill reads as follows:
“(4) the term ‘covered period’ means the period—
(A) beginning on the date of the origination of a covered loan; and
(B) ending on a date selected by the eligible recipient of the covered loan that occurs during the period—
(i) beginning on the date that is 8 weeks after such date of origination; and
(ii) ending on the date that is 24 weeks after such date of origination;”
10. 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) organization is defined as follows:
“(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.
The proposed bill states as follows regarding 501(c)(6) PPP loan eligibility:
(I) IN GENERAL.—Any organization that is described in section 501(c)(6) of the Internal Revenue Code and that is exempt from taxation under section 501(a) of such Code (excluding professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity) shall be eligible to receive a covered loan if—
(aa) the organization does not receive more than 15 percent of its receipts from lobbying activities;
(bb) the lobbying activities of the organization do not comprise more than 15 percent of the total activities of the organization; and
(cc) the cost of the lobbying activities of the organization did not exceed $1,000,000 during the most recent tax year of the organization that ended prior to February 15, 2020; and
(dd) the organization employs not more than 300 employees.”
11. Additional Eligible Expenses That Count Towards Forgiveness
The Act expands on the list of forgivable expenses to now include the following:
1. Covered operations expenditures defined as “a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.”
2. Covered property damage cost defined as “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”
3. Covered supplier cost defined as “an expenditure made by an entity to a supplier of goods for the supply of goods that (1) are essential to the operations of the entity at the time at which the expenditure is made; and (2) is made pursuant to a contract, order, or purchase order in effect at any time before the covered period with respect to the applicable covered loan, or with respect to perishable goods in effect before or at any time during the covered period with respect to the applicable covered loan.”
4. Covered worker protection expenditure defined as means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
The Act includes specific examples of what may be included as a Covered Worker Protection Expenditure as well as examples of items that do not qualify for such expense.
12. Borrowers Can Amend Loan Applications to Request Increase in PPP Loan Amount As a Result of A Change In the Rules
The Act requires that the SBA issue guidance to lenders within 17 days to provide a process for borrowers who returned all or part of their PPP loan to reapply for the maximum allowable amount so long as they have not requested forgiveness, perhaps allowing those borrowers who returned their loan before the issuance of the $2 million loan necessity safe harbor to reapply and receive their original loan amount. The Act also allows borrowers that would have received an increased loan amount due to changes in interim final rules issued by the SBA or as a result of the Act to reapply for the difference.
13. Relief for Schedule F Farmers (Old McDonald Had a Loan)
There was some confusion as to whether farmers reporting income on Schedule F were eligible to receive a second bite PPP loan. Fortunately, the Act includes specific provisions that allow farmers reporting income on a Schedule F to qualify for a PPP loan based on their 2019 Schedule F income in a similar manner that applies to Schedule C taxpayers.
14. EIDL Program For Businesses Hardest Hit by the Coronavirus
The Act creates a targeted EIDL program to assist businesses that were hardest hit by the economic impacts of the Coronavirus. The EIDL program was initially enacted many years ago to provide loans to businesses that have suffered from major storms, droughts, and other federally-declared disasters. EIDL loans bear interest at 3.75% and come with significant loan program requirements that very few borrowers are aware of or have thought about.
Businesses that receive EIDL loans are unable to pay several things without SBA approval, including paying dividends, paying bonuses to any employees, including non-owners, and using EIDL funds for anything other than business purposes.
EIDL borrowers must keep records of how the EIDL loan is spent, and provide this information to the SBA within 90 days after the loan is repaid. There is a lack of privacy for the borrower of an EIDL loan, and the loan details are available to the public because of the Freedom of Information Act, enumerated at 5 U.S.C. § 552.
While these loans can save businesses, owners should speak with their advisors before making a decision to take these loans, and many borrowers will be well advised to pay their loans back while they can, especially if they might end up in bankruptcy and thus scrutinized by the Department Of Justice and other federal agencies who frequent the bankruptcy courts.
The term “covered entity” for the targeted EIDL program is stated as follows:
“(2) COVERED ENTITY.—The term ‘‘covered entity’’—
(A) means an eligible entity that—
(i) applies for a loan under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) during the covered period, including before the date of enactment of this Act;
(ii) is located in a low-income community;
(iii) has suffered an economic loss of greater than 30 percent; and
(iv) employs not more than 300 employees; and
(B) except with respect to an entity included under section 123.300(c) of title 13, Code of Federal Regulations, or any successor regulation, does not include an agricultural enterprise.”
The amount of funding that a covered entity is eligible for in the targeted EIDL program is stated as follows:
“(b) ENTITLEMENT TO FULL AMOUNT.—
(1) IN GENERAL.—Subject to paragraph (2), a covered entity, after submitting a request to the Administrator that the Administrator verifies under subsection (c), shall receive a total of $10,000 under section 1110(e) of the CARES Act (15 U.S.C. 9009(e)), without regard to whether—
(A) the applicable loan for which the covered entity applies or applied under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) is or was approved;
(B) the covered entity accepts or accepted the offer of the Administrator with respect to an approved loan described in subparagraph (A); or
(C) the covered entity has previously received a loan under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36))”
The priority for the targeted EIDL program is as follows:
“(d) ORDER OF PROCESSING.—The Administrator shall process and approve requests for payments under subsection (b) in the order that the Administrator receives the requests, except that the Administrator shall give—
(1) first priority to covered entities described in subsection (b)(2)(A); and
(2) second priority to covered entities that have not received emergency grants under section 1110(e) of the CARES Act (15 U.S.C. 9009(e)), as of the date on which the Administrator receives such a re5 quest, because of the unavailability of funding to carry out such section 1110(e).”
15. EIDL Advance Non-Taxable and No Longer Reduces PPP Loan Forgiveness
The Act also replenishes the EIDL Advance fund, which allows businesses suffering a substantial economic injury to apply for an advance that does not need to be repaid or up to $1,000 per employee limited to $10,000 total.
Prior law stated that any EIDL Advance received would reduce PPP Loan Forgiveness, essentially requiring the Advance to be repaid.
The new Act repeals this provision so the receipt of an EIDL Advance will have no impact on PPP loan forgiveness. Borrowers that have already applied for and received loan forgiveness presumably may now amend their application to request that the $10,000 EIDL Advance (or amount actually received) not reduce their forgiveness amount and request repayment.
This Act will provide much needed relief to small businesses affected by the Coronavirus. There are sure to be changes and corrections in interpretation and meaning, and numerous SBA pronouncements that follow, but I will be working day and night to keep you posted and support the needs of advisors who must give their clients good advice on how these rules work and what to do next to maximize proper benefits and make proper financial, tax and business decisions.
Please use this information to help others in the spirit of the holiday season.