Congress expanded the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act with the passage of the Consolidated Appropriations Act on December 27, 2020. The Consolidated Appropriations Act also clarifies the deductibility of certain expenses paid for with funds from a loan under PPP and tax impact on income for the forgiveness of the related debt.
Beginning January 11, 2021, businesses are eligible for a second round of PPP loan funding irrespective of whether a loan was received in the first round. The definition of a “small business” has also been changed under the bill. Small businesses are defined as businesses with no more than 300 employees and whose revenues dropped by 25% during one of the first three quarters of 2020 (or the fourth quarter if the business is applying after January 1, 2021). This decrease is determined by comparing the quarters gross receipts with the same quarter in the prior year.
A business may receive loan amounts of up to 2.5 (3.5 for accommodation and food services sector businesses) times their average monthly payroll costs in 2019 or the 12 months before the loan application. The limit has been reduced from the original $10 million available in the first round to $2 million for this round of PPP loan funds.
Businesses that were eligible to receive PPP loans under the CARES Act were small businesses, nonprofit organizations, veterans’ organizations and tribal businesses. The new bill expands the types of organizations that may request a PPP loan to:
- Tax-exempt organizations described in Internal Revenue Code Section 501(c)(6) that have no more than 300 employees and whose lobbying activities do not comprise more than 15% of the organization’s total activities.
- Housing cooperatives that have no more than 300 employees.
- “Destination marketing organizations” that have no more than 300 employees.
- Stations, newspapers and public broadcasting organizations that have no more than 500 employees.
Under the CARES Act, a recipient of a PPP loan could use the funds to meet payroll costs, certain employee healthcare costs, interest on mortgage obligations, rent and utilities. As long as 60% of those funds were used on payroll costs, the loan would be forgiven. The Consolidated Appropriations Act added four types of non-payroll expenses that can be paid from and submitted for forgiveness, for both round 1 and round 2 PPP loans.
- Covered operational expenditures.
- Covered property damage.
- Covered supplier costs.
- Covered worker protection equipment. (i.e., costs of personal protective equipment incurred by a borrower to comply with rules or guidance issued by the Department of Health & Human Services, the Occupational Safety and Health Administration or the Centers for disease control, or a state or local government).
In addition, the bill confirms that business expenses paid with PPP loan funds may be deducted for federal income tax purposes. Originally the IRS took the position in guidance that expenses paid with forgiven loan proceeds that are not considered taxable income may not be deducted. The bill clarifies that such expenses are fully deductible, and the effective date of this provision applies to taxable years ending after the date of the enactment of the CARES Act.
The bill also provides a new simplified forgiveness procedure for loans of $150,000 or less. These borrowers cannot be required to submit to the lender any documents other than a one-page signed certification that sets out the number of employees the borrower was able to retain because of the PPP loan, an estimate of the amounts spent on payroll-related costs, the total loan value and that the borrower has accurately provided all information required and retains all relevant documents.
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