Congress passed, and President Trump signed, the Consolidated Appropriations Act, 2021. Included in its approximately 5,600 pages is the second draw of forgivable Paycheck Protection Program (PPP) loans. The first round allowed loans to businesses with 500 or fewer employees and to certain businesses with multiple locations, for which each location could not have more than 500 employees. Unfortunately, this opened the door to some large businesses gobbling up the allocated funding and shutting out the smaller businesses that the loans were intended to help until additional funding was authorized. Unlike the prior loan program, this round will truly be limited to small businesses that incurred revenue losses. Eligibility is limited to businesses
Eligible Entities – The eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. Churches and religious organizations are eligible for loans if they otherwise meet the requirements, and the legislation prevents future administrations from making them ineligible.
Loan Terms – The legislation establishes a maximum loan size of 2.5 times the average monthly payroll costs in the one year prior to the loan, or the calendar year, up to $2 million. There is an exception for borrowers in the hospitality or food services industries, who may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Loan Forgiveness – Like the first PPP loan, full loan forgiveness is available if the borrower spends at least 60% of the second draw on payroll costs (this time including additional group insurance payments, including vision, dental, disability, and life insurance), with allowable nonpayroll costs of 40%. The allowable non-payroll expense category – which was originally limited to rent, mortgage interest, and utilities – has been expanded to include the following:
A borrower may choose either an 8-week or a 24-week covered period.
Forgiveness Reduction – The rule reducing loan forgiveness for a borrower who reduced the number of employees retained and reduced employees’ salaries by more than 25% continues to apply.
Simplified Loan Forgiveness – The loan-forgiveness process is simplified for borrowers with PPP loans of $150,000 or less. This means another version of the SBA’s loan-forgiveness application form will be forthcoming. Congress has specified that it be a one-page certification that includes a description of the number of employees whom the eligible recipient was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. Because borrowers using the simplified application form will be certifying that they meet the requirements for forgiveness and will be subject to penalties if they are found not to qualify, it may be a good idea for applicants to fill out a “draft” of the longer version of the form to substantiate their certification as well as retain it with the business’s employment and expense records. The legislation requires employment records to be kept for 4 years and for other records to be kept for 3 years after the date when the forgiveness request is submitted.
Deductibility of Expenses – The IRS recently issued a ruling essentially saying that because businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses paid from the forgiven loan aren’t deductible. However, Congress members have been saying all along that this was not the Congressional intent in the original PPP legislation. In a rebuttal to the IRS, Congress has made it crystal clear in the recently passed legislation that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This applies retroactively to the first round of PPP loans as well.
Funds Availability – The legislation requires the SBA to prepare regulations and implement the second-draw PPP within 10 days after the bill was signed into law (December 27, 2020) and for the program to continue through March 31, 2021.
Please give this office a call at (616)- 957-2055 if you have questions related to the PPP loan second draw.