On December 27, 2020, the President signed the Consolidated Appropriations Act, 2021 (鈥�2021 Act鈥�), which contains the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (鈥淓conomic Aid Act鈥�). The acts contain changes to the Paycheck Protection Program (鈥淧PP鈥�) that are intended to limit assistance to small businesses that need financial support. The following highlights the impact of the 2021 Act and the Economic Aid Act on PPP loans.
Tax Treatment of the Paycheck Protection Program Loans
The 2021 Act provides for special tax treatment in Division N, Section 276 for forgiveness of loans granted pursuant to the original Paycheck Protection Program under the CARES Act (鈥淓xisting PPP Loans鈥�) and any new PPP loans (鈥淣ew PPP Loans鈥�) under the Economic Aid Act.
The Economic Aid Act provides that any loan forgiveness under either the Existing PPP Loan Program or the New PPP Loan Program (collectively, the 鈥淧PP Program Loans鈥�) shall not be treated as gross income to the recipient for tax purposes or the recipient鈥檚 partners or shareholders. Further, all costs that were considered in calculating a PPP loan (salaries, rent and utilities) are still eligible to be used as deductions against gross income of a PPP loan applicant even if it receives loan forgiveness. The IRS had previously issued a ruling that the costs could not be considered as offsets to income if loan forgiveness had been granted to the taxpayer and those costs were used to calculate the Existing PPP Loan.
Specifically, the PPP Program Loans are subject to the following tax treatment:
- No amount shall be included in the gross income of a recipient by reason of forgiveness of a PPP Program Loan.
- No deduction shall be denied, no tax attribute reduced and no basis shall be increased as the result of a forgiveness under a PPP Program Loan.
- Neither the partners in a partnership nor the shareholders of an S corporation shall have to recognize any gross income by reason of forgiveness of a PPP Program Loan.
- The partners in a partnership and the shareholders of an S corporation shall be entitled to their distributive share of any costs giving rise to forgiveness under either of the PPP Loan Programs.
PPP Loan Program Update and Modifications
The PPP created under the CARES Act is redesignated by the Economic Aid Act as a form of a 7(a) loan under the Small Business Act and is modified by the terms of the Economic Aid Act both as to existing loans and as to new loans. The general requirements related to covered costs and forgiveness remain but are modified by the Economic Aid Act. The changes discussed below do not apply to fully forgiven PPP loans.
Increase in Loan Amounts
A loan recipient that 1) returned all or a part of its PPP loan or 2) did not take the full amount of the maximum loan amount, and in either case has not yet received loan forgiveness, may reapply for a loan for an amount equal to the difference between the maximum amount applicable and the initial loan amount received. The SBA is required to develop specific procedures to do so within 17 days of the enactment of the Economic Aid Act.
Additional Eligible Expenses For PPP Loans
Additional Eligible Expenses covered under PPP loans now include:
- Covered Operations Expenditure, 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;
- Covered Property Damage Cost, 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;
- Covered Supplier Cost, an expenditure made by an entity to a supplier of goods for the supply of goods that鈥�
- are essential to the operations of the entity at the time at which the expenditure is made; and
- is made pursuant to a contract, order, or purchase order鈥�
- 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;
- Covered Worker Protection Expenditure, 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鈥�19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID鈥�19;
- The purchase, maintenance, or renovation of assets that create or expand鈥�
- A drive-through window facility; o An indoor, outdoor, or combined air or air pressure ventilation or filtration system;
- A physical barrier such as a sneeze guard;
- An expansion of additional indoor, outdoor, or combined business space;
- An onsite or offsite health screening capability; or
- Other assets relating to the compliance with the requirements or guidance from the Health and Human Services and/or the Department of Labor (typically specified personal protective equipment).
Covered Period
The Covered Period under any PPP loan, including any new loan, is the period after the date of PPP loan origination that is between 8 and 24 weeks. The PPP recipient has the discretion to choose the length of the Covered Period.
Paycheck Protection Program
Second Draw Loans
Eligibility for Second Draw Loans Entities eligible for second draw loans include 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鈥�
- Employs no more than 300 employees; and
- Had gross receipts during any of the first, second, third or fourth quarter in 2020 demonstrating at least 25% reduction from the gross receipts of the entity during the same quarter in 2019. (There are special rules for entities not in business in 2019 during one or more of the test quarters. No loans will be granted to an entity that did not exist as of February 15, 2020.)
Maximum Loan Amount
The maximum loan amount for second draw loans is the lesser of鈥�
- The product obtained by multiplying鈥�
- at the election of the eligible entity, the average total monthly payment for payroll costs incurred or paid by the eligible entity during鈥�
- the 1-year period before the date on which the loan is made; or
- calendar year 2019; by 2.5; or
- $2,000,000
- at the election of the eligible entity, the average total monthly payment for payroll costs incurred or paid by the eligible entity during鈥�
Loan Forgiveness Calculation
An eligible entity shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred or expenditures made during the covered period:
- Payroll costs, excluding any payroll costs that are subject to tax credit under the Cares Act;
- Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation;
- Any covered operations expenditure;
- Any covered property damage cost;
- Any payment on any covered rent obligation;
- Any covered utility payment;
- Any covered supplier cost; and
- Any covered worker protection expenditure.
Limitations on Forgiveness
The forgiveness amount shall be equal to the lesser of鈥�
- The amount of the loan based on qualified expenses above; and
- The amount of the loan used for payroll costs during the covered period divided by 0.60.
PPP Loans to Entities in Bankruptcy
Entities in bankruptcy are allowed to apply for and obtain PPP loans with approval from the bankruptcy court.
Note: This information has been provided by our legal counsel, .