On December 27, 2020, President Trump signed into law the latest COVID-19 relief package, providing $900 billion in much-needed aid to individuals and businesses during the ongoing coronavirus pandemic. A crucial part of this overdue legislation is the more than $284 billion allotted for a new round of Paycheck Protection Program (PPP) funding. This current round of PPP funding extends through March 31, 2021, or until the funding is exhausted. Critically, the legislation also avoids a government shutdown.
Of the more than $284 billion in additional funding allocated to the PPP, $35 billion is set aside for first-time borrowers, $15 billion of which will be set aside for smaller, first-time borrowers with 10 or fewer employees, or loans less than $250,000 in low-income or moderate-income neighborhoods. In addition, $25 billion of the new PPP funding will be set aside for second draw PPP loans for smaller borrowers with ten or fewer employees, or loans less than $250,000 in low-income or moderate-income communities. The U.S. Small Business Administration (SBA) is permitted to adjust the set-asides as necessary 25 days after the enactment of the legislation (which will be Jan. 21, 2021, allowing the Biden administration to make this decision).
Small businesses in need of additional relief can begin to evaluate the revised Paycheck Protection Program rules and assess their eligibility to apply for additional PPP funding.
Notable Changes to the Paycheck Protection Program
The new legislation modifies important components of PPP criteria. For example, the PPP provisions place several restrictions on eligibility including, with few exceptions, prohibiting publicly traded companies, companies created in China or having significant operations in China, and entities primarily engaged in political or lobbying activities from obtaining PPP loans. The legislation also opens up the possibility that certain small businesses in the bankruptcy process, which were previously excluded, may now have the opportunity to obtain PPP loans subject to a determination by the SBA Administrator and court approval. Certain housing cooperatives, news organizations and trade associations are also now eligible for PPP loans. A business must have been in operation on Feb 15, 2020 to apply for a PPP loan.
The relief package also allows small businesses and nonprofit entities that exhausted their first PPP loan to obtain a second PPP loan, a “second draw” loan. An entity is eligible for a second draw loan if it employs no more than 300 employees and can demonstrate at least a 25% reduction in gross receipts in the first, second, third or fourth quarter of 2020 relative to the same quarter in 2019. Borrowers may receive a second draw loan up to 2.5 times their average monthly payroll costs, or for entities in the accommodation and food service industry assigned to NAICS code 72, loans of up 3.5 times their average monthly payroll costs. In both cases, no loan can exceed $2 million, a substantial decrease from the $10 million limit applicable to the initial PPP loans.
A key change to the Paycheck Protection Program is the expansion of expenses for which the PPP loan can be used. The CARES Act allowed borrowers seeking loan forgiveness to use the loan proceeds to maintain payroll and cover other limited expenses such as mortgage, lease and utility payments. The expanded program identifies additional permitted uses of loan funds, including:
- Covered operations expenditures. 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 costs. Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
- Covered supplier costs. Expenditures made by an entity for the supply of goods that 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 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 expenditures. An operating or capital expenditure to facilitate the adaption of the business activities of an entity to comply with requirements established or guidance issued by HHS, the CDC, OSHA or any equivalent requirements established or guidance issued by a state or local government during the period beginning March 1, 2020, and ending the date on which the COVID-19 national emergency declaration expires. This may include expenditures for personal protective equipment, physical barriers such as sneeze guards, and an indoor, outdoor, or combined air or air pressure ventilation or filtration system.
Borrowers may utilize funds from earlier PPP loans to cover the expanded categories of expenses if their original loan has not yet been forgiven.
Tax Treatment of PPP Loans
The law also provides clarification of the tax treatment of PPP loan forgiveness. It clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan and that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven. This provision overturns the current IRS position, Notice 2020-32, which ruled that although PPP loan forgiveness would not generate taxable income, no deduction was allowed under the Internal Revenue Code for an expense that was otherwise deductible if the payment of the expense resulted in forgiveness of a covered loan pursuant to the CARES Act. Many borrowers and tax professionals have argued since the inception of the Paycheck Protection Program that it was Congress’ intent that business expenses paid with forgiven PPP loans are tax-deductible. Congress has now confirmed its position, essentially providing a double tax benefit to borrowers.
The tax treatment is intended to apply to borrowers who will receive PPP loans pursuant to the supplemental legislation and those borrowers who received PPP loans under the original CARES Act, including borrowers who have already applied for loan forgiveness.
The PPP continues to focus on payroll, requiring borrowers to spend at least 60% of their loans on payroll to receive full forgiveness. The remaining 40% of the funds may be used on the expanded list of non-payroll covered expenses. The period for which expenses count toward loan forgiveness will begin on the date of loan origination and end on the date the borrower chooses that is between eight and 24 weeks after loan origination.
The new law does not change the rule reducing PPP loan forgiveness if the borrower has reduced the number of employees or reduced employee salaries in excess of 25% during the covered period. The relief package extends the existing safe harbors, giving PPP borrowers an opportunity to restore the number of employees and salaries by the required deadline so as not to suffer a reduction in forgiveness.
The relief package also creates a simplified forgiveness process for loans in the amount of $150,000 or less. Recipients of these smaller loans will receive forgiveness if they sign and submit to the lender a short certification, which includes a description of the number of employees the borrower was able to retain as a result of the covered loan, the estimated total amount of the loan spent on payroll costs and the total loan amount. Borrowers must also attest that the borrower accurately provided the required certification and complied with the PPP loan requirements. SBA is required to create this simplified loan forgiveness certification form within 24 days of the date of enactment. Notably, the law specifically provides that SBA cannot require a recipient of a loan less than $150,000 to submit any application or documentation beyond the short certification and the information required to substantiate revenue loss requirements at the time of the application for loan forgiveness. Borrowers should, however, retain relevant records related to employment and compliance with applicable regulations, as a borrower may be required to submit documentation to a lender or may later be subject to audit by the SBA. The legislation does not address the additional loan forgiveness documentation requirements in support of borrowers’ underlying need for loans in excess of $2 million that are the subject of a recent lawsuit. See Complaint, The Associated General Contractors of America, Inc. v. United States Small Business Administration, et al., No. 1:20-cv-03567 (D.C.Cir. December 8, 2020).
The SBA only has until January 6, 2020, to establish implementing regulations to carry out these new PPP provisions. Faegre Drinker continues to monitor the status of the Paycheck Protection Program and any additional guidance the SBA may issue.