Loan Forgiveness and Key Paycheck Protection Program Changes
The Consolidated Appropriations Act of 2021 (CAA) was signed into law in December of last year. This law brought with it many changes to the Paycheck Protection Program or PPP.
These changes include:
1) First draw PPP loans
2) Second draw PPP loans
3) Loan forgiveness enhancements
4) Changes to how Economic Injury Disaster Loans work with Small Business Association loans
First Draw Paycheck Protection Program Loans
If you did not apply for a PPP loan last year, it is not too late. But you need to act fast. Most of the companies approved last year as well as several new categories of businesses qualify.
Those businesses that do not qualify include:
Those who will qualify for the Shuttered Venue Operators (SVO) Grant program
A public company
A permanently closed company
A company in bankruptcy
A company engaged in any illegal activity
A hedge fund or private equity firm
An individual who employs household employees
A company with a 20% or greater owner who is presently incarcerated
The President or Vice President head of any Executive Department of the United States
A member of Congress or a spouse of such a person
The deadline to apply for a PPP loan is March 31st, 2021, or the date on which the program runs out of money.
How Much Will I Get?
The loan amount equals the total cash payroll costs for any 12 month period in 2019 or 2020, divided by 12, and multiplied by two and a half. This is about 2 and a half months of payroll. The instructions and guidance provided by participating banks are usually sufficient.
There is a special rule for farmers. The rule allows the farmer to use gross income instead of the net income from their business. This loan amount will cap at $20,833, exclusive of qualifying employee wages. Special rules also apply for partnerships, sole proprietorships, and seasonal employers.
Second Draw Paycheck Protection Program Loans
Businesses are eligible for second draw PPP if:
1. The business received a first draw PPP loan
2. The borrower and its affiliates have 300 or fewer employees
3. The borrower was in operation on February 15th, 2020
4. The borrower has used or will use previous loan proceeds
5. Current economic uncertainty makes the loan request necessary to support ongoing operations. Note: The Small Business Administration (SBA), in consultation with the Department of the Treasury, states that borrowers meet this requirement if the loan amount is less than 2 million dollars, including affiliates.
6. Has at least 25% reduction in gross receipts calculated as follows:
a. Gross receipts during any quarter of 2020 were at least 25% less than gross receipts for the same quarter in 2019
b. Gross receipts for 2020 are at least 25% less than gross receipts for 2019 as substantiated by tax returns
c. Three other situations if the business was not in business during parts of 2019
Definition of “Gross Receipts”
The interim final rules define gross receipts as: “All revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.” Taxes, such as sales taxes, are excluded.
What Documents Should I Submit?
The SBA needs documentation of the 25% reduction in gross receipts for all loans. Loans greater than $150,000 will need documentation at the time of application for the loan. Those with loans less than $150,000 will need to submit documentation of the 25% reduction at the time they apply for forgiveness.
The documentation required will be disclosed by the lender and should generally include monthly or quarterly profit and loss comparative statements and possibly bank statements. The applicant should sign the financial statements as being true and correct to the best of their knowledge.
The Bank/SBA portal is screening loan applications much more in Round 2, with an estimated 30% of loans being sent back for a variety of reasons - indicated by an error code the lender needs to ferret out. Further, if your forgiveness application for Round 1 is pending, that too may cause a delay. So you might want to hold up on filing for Round 1 forgiveness if you plan to apply for PPP2.
The SBA indicates that the same rules for obtaining forgiveness on a first draw loan will apply to second draw loans. And the rules for spending are similar with both an 8 or 24 week “covered period” beginning from the date of the loan.
The formulas for determining the amount of a second draw PPP loan follow the formula for first draw PPP loans with a few modifications. A borrower will still calculate an average monthly payroll cost. But for businesses in the accommodation and food service industries the factor to be used will be 3.5 instead of 2.5. The largest amount of the loan may not exceed 2 million.
Can Borrowers Reapply for PPP Loans?
In four situations the act now allows existing PPP loan borrowers to apply or reapply.
1. Borrowers who returned all or part of their initial PPP loan, or did not accept the full amount, may reapply for the largest amount applicable. This situation applies unless forgiveness was received before December 27, 2020. Caution: banks might not be geared to accept these applications right now.
2. For partnerships who received a PPP loan but did not include any amount for partner compensation, the lender may submit a request no later than 3/31/21. To increase the PPP loan amount, include appropriate partner self-employment income.
3. A seasonal employee that received a loan before December 27, 2020 and would be eligible to hire may request an additional loan amount from the lender unless forgiveness has been received before December 27, 2020.
4. Farmers and ranchers may base their loan amount on their gross receipts rather than net income unless their loans were forgiven before December 27, 2020. In this case, the largest loan amount would be $20,833.
Big Surprise, Your State May Tax Your PPP
CAA confirms that no deduction will be denied or reduced. No tax attribute will be reduced. And no basis increase will be denied by reason of the exclusion from gross income of a PPP loan. This means that the forgiveness of a loan will not be taxed and the expenses will still be deductible. However, this is for US tax purposes only.
While federal law will not tax PPP loan proceeds or expenses, many states, including NC, will not follow that rule. Expect to pay income taxes on the expenses used for PPP forgiveness. These will not be deductible under state law.
Since there are no wage payments associated with sole proprietorships or partners, there will be no disallowance or taxation of the forgiveness.
PPP Forgiveness Application Process
SBA has extended use of form 3508S, now making it available for loans less than $150,000. This simplifies the process for roughly 87% of all PPP loans so far. For loans of $150,000 or less, the borrower will need to submit a one-page form to:
Provide the number of employees the borrower was able to keep because of the PPP loan
Provide an estimated amount of the loan spent on payroll costs
Provide the loan amount
Keep records relevant
Prove compliance with requirements of employment records for 4 years following submission of the form.
Also, with respect to other records, retain them for a period of three years following submission.
Rule Changes
PPP Loans more than $150,000 will not see many changes. The CAA changed the rules allowing the Employee Retention Credit (ERC) to be claimed in 2020 and 2021 even if you had PPP funds. We just may not double dip - using wages for both PPP forgiveness and the employee retention credit. We are expecting guidance from the IRS. Any payroll that qualifies for the PPP loan forgiveness cannot be used by the ERC. The IRS needs to provide guidance on which payroll expenses will qualify for this credit. You can claim PPP forgiveness once we know the interplay between the two.
One more reason to delay forgiveness application: The SBA will issue a “consolidated forgiveness IRF” to clarify several hundred pages of disparate rules.
Lastly, if you are applying for PPP2, you might want to delay the forgiveness application since we have heard the forgiveness application may bog down the PPP2 application.
New Provisions Applicable to All Loans
Non-payroll costs may qualify for forgiveness of up to 40% of the loan. Non-payroll costs still include mortgage interest expense, qualified rental expense, and qualified utilities. The CAA expanded additional qualifying non-payroll costs including:
Covered operations expenditures: business software, cloud computing services that facilitate business operations, product/service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, 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 occurring in 2020 and not covered by insurance or otherwise
Covered supplier costs: expenditures made for the supply of goods that are
Essential to the operations
Made pursuant to a contract, order, or purchase order:
In effect any time before the covered period with respect to the PPP loan
With respect to perishable goods, in effect before or at any time during the covered period
Covered worker protection expenditure costs including capital expenditures to facilitate business activities in compliance with the requirement or guidance issued by HHS, CDC, OSHA, or any equivalent requirements of state or local government during the period beginning March 1, 2020, and ending on the date of expiration of the Presidentially declared national emergency with respect to Covid-19.
Covered expenditure cost related to maintenance of standards for sanitation, social distancing, and any worker or customer safety requirement related to Covid-19. These expenditures may include the purchase, maintenance, or renovation of assets that create or expand:
A drive-through window facility
An indoor, outdoor, or combined air or air pressure ventilation or filtration system
A physical barrier such as a sneeze guard
An expansion of indoor, outdoor, or combined business space
An onsite or offsite health screening capability
Other assets relating to the compliance of requirements or guidance as determined by SBA in consult with HHS and Secretary of Labor
Purchase of materials covered by Section 328.103(a) Of Title 44, Code Of Federal Regulations (generally: N95 respirators, PPE surgical masks, physical barriers, PPE gloves, surgical and isolation gowns, syringes, and hypodermic needles).
But does not include any residential real property or intangible property.
Economic Injury Disaster Loan Program Grants
The EIDL grant will not be taxed. Similar wording in CAA as to the PPP loan forgiveness and loan forgiveness expenses.
The CAA will provide more grants of up to $10,000 through December 31st of 2021. But, you must prove a reduction in gross receipts of more than 30% during an 8 week period between 3/2/20 and 12/31/21 relative to a comparable 8 week period immediately preceding 3/2/20 or during 2019.
Action Items:
If you did not apply for the first draw PPP last year or returned part of what you received, consider applying now.
If you have a 25% drop in revenue during any quarter compared to last year or for the year as a whole you should consider applying for the second draw PPP2.
Be aware that extra costs now qualify for forgiveness, up to 40% of the loan.
Final Thoughts
Last year this money went fast. Initial indications are that fewer businesses will qualify and loan activity so far is confirming that. Nonetheless, it is in your best interest to apply as soon as possible if you qualify. By the end of January, approximately $70B of $200B had been approved.
The good news is that any forgiveness of the Paycheck Protection Program loan will not be taxable on your federal return. Expenses paid with forgivable PPP loan monies are tax-deductible on your federal return. Same for the EIDL grants. However, many states, including NC, will tax your PPP loan.
Our Advice
As with all business and finance techniques, we highly suggest before implementing any of these ideas the applicant consult with their financial advisors. The ideas presented above are appropriate in most general cases, but specifics to that particular applicant may preclude a technique’s applicability.
Holden Moss CPAs is dedicated to aiding businesses in this difficult time. If you have any questions regarding your loan applications, give us a call at (919) 556-6216. Contact us via email at admin@holdenmoss.com. We look forward to working with you.