On Sunday, December 27, 2020, President Donald Trump signed a COVID-19 relief bill that extends and modifies several provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Title III of the new law, called Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Act), allocates $284 billion to a second round of Paycheck Protection Program (PPP) Loans. The Act provides the following:
Eligible borrowers include small businesses, nonprofit organizations, housing cooperatives, veterans organizations, Tribal business concerns, eligible self-employed individuals, sole proprietors, independent contractors or small agricultural cooperatives that:
- Employ no more than 300 employees; and
- Had at least a 25% reduction in gross receipts in at least one quarter in 2020 when compared to the same quarter in 2019.
Borrowers who previously received a PPP loan may be eligible for a second PPP loan provided they meet the eligibility requirements and have used, or plan to use, the full amount of their first PPP loan.
Debtors in Subchapter V small business bankruptcy reorganization cases, Chapter 12 cases and Chapter 13 cases are eligible to receive a PPP loan under the Act. However, debtors in Chapter 11 cases are not eligible to receive a loan.
Borrowers may qualify for up to 2.5 times their average monthly payroll determined by:
- Multiplying average gross monthly payroll costs for the one-year period before the date of the loan by 2.5; or
- Multiplying average gross monthly payroll costs for 2019 by 2.5.
Borrowers with a NAICS code beginning with 72 (restaurants, hotels, etc.) are eligible to receive up to 3.5 times their average monthly payroll cost.
PPP loans may not exceed $2 million.
To obtain complete forgiveness, borrowers must spend at least 60% of PPP loan proceeds on payroll costs. The new law clarifies the definition of “payroll costs” to include certain group benefits such as group life, disability, vision or dental insurance. Borrowers must spend the remaining loan proceeds on other qualified expenses during the covered period. Qualified non-payroll expenses include:
- Rent obligations;
- Mortgage interest;
- Covered operations expenditures (payments for software and cloud-computing services that facilitate business operations);
- Covered property damage costs (costs related to property damage and vandalism or looting that occurred during 2020 and were not covered by insurance);
- Covered supplier costs (payments to suppliers of goods that are (i) essential to borrowers’ businesses; and (ii) made pursuant to a contract in effect before the covered period); and
- Covered worker protection expenditures (payments to adapt business activities to comply with COVID-19 federal health and safety requirements).
The expanded list of qualified non-payroll expenses apply to all PPP loans, including loans under the CARES Act, except for those already forgiven.
The “covered period” begins when the PPP loan is originated. Borrowers can choose a covered period of eight or 24 weeks.
The Act provides a simplified forgiveness process for loans less than $150,000. The one-page forgiveness application will require the borrower to disclose:
- The number of employees retained because of the loan;
- The estimated amount of the loan proceeds spent on payroll; and
- The total amount of the loan.
The borrower will be required to certify that they have complied with the requirements of the loan and the borrower must retain records to prove compliance. Borrowers will not be required to submit additional documentation. Once issued by the Small Business Administration (SBA), the simplified forgiveness application will be available to borrowers who received a PPP loan for less than $150,000 under the CARES Act and who have not yet applied for forgiveness.
Economic Injury Disaster Loans
The Act no longer requires borrowers to subtract Economic Injury Disaster Loan (EIDL) amounts from their PPP loan forgiveness amount. This will have a retroactive effect to the enactment of the CARES Act. The SBA is required to “issue rules that ensure equal treatment” for borrowers whose loans have already been forgiven and who had their EIDL grants subtracted from the forgiven amount.
Tax Deductibility for Expenses
The Act clarifies that PPP loans used for business expenses are tax-deductible. According to the Act, “no amount shall be included in the gross income of the eligible recipient by reason of forgiveness” and “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.” This provision applies to PPP loans under both the CARES Act and the new Act. The Act also includes language for flow-through entities so that distributions do not create unintended taxable income.
The Act also requires the SBA to issue regulations within 10 days after the date of enactment to carry out the provisions of the Act.
The rules surrounding PPP loans are complex and business specific. If you have concerns about the rules, please contact Ford Turrell, Timothy Hillegonds, Rob Davies, Matthew Crowe, Charlie Goode, Jeffrey Ott or your Warner attorney.