The U.S. Senate and House of Representatives overwhelmingly passed a $900 billion COVID-19 relief bill Monday night, December 21, which provides $600 stimulus payments to individuals, adds $300 to extended weekly unemployment benefits, provides more than $300 billion in aid for small businesses, and contains several provisions related to the Paycheck Protection Program (PPP). The legislation was signed into law on December 27, 2020. Read more in depth about the other non-PPP related key provisions in our blog, “New Pandemic Relief: What You Need to Know.”
After the CARES Act announced the PPP in March 2020, concerns about the deductibility of expenses with PPP loan proceeds have lingered over borrowers and tax practitioners. The Consolidated Appropriations Act ensures tax deductibility for business expenses paid with forgiven Paycheck Protection Program (PPP) loans, provides fresh PPP funding, makes Sec. 501(c)(6) not-for-profit organizations eligible for first-time loans, and offers businesses facing severe revenue reductions the opportunity to apply for a second loan.
In summary, expenses paid with PPP loan proceeds are now 100% deductible. The change applies to all PPP loans, even if those loans were already forgiven at an earlier date.
Who is eligible to apply?
PPP2 loans will be available to first-time qualified borrowers and, for the first time, to businesses which previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:
- Have 300 or fewer employees
- Have used or will use the full amount of their first PPP loan
- Can demonstrate a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019
PPP2 also makes the forgivable loans available to Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” (as defined in the act), provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and cost no more than $1 million during the most recent tax year, which ended prior to Feb. 15, 2020.
PPP2 will also permit first-time borrowers from the following groups:
- Businesses with 500 or fewer employees which are eligible for other SBA 7(a) loans
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Not-for-profits, including churches
- Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.
The bill allows borrowers who returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
PPP loan terms
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest and utilities. PPP2 also makes the following potentially forgivable:
- Covered worker protection and facility modification expenditures, including personal protective equipment (PPE), to comply with COVID-19 federal health and safety guidelines
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations
- Covered operating costs such as software and cloud computing services and accounting needs
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks—the same parameters PPP1 had when it stopped accepting applications in August.
PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, which is the same as with PPP1; however, the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.
Additional eligible non-payroll uses of PPP loans
Allowable use of PPP loans expanded to include four additional categories:
- Covered operations expenditures – Includes payments for any business software or cloud computing service which facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, HR, sales and billing, accounting or tracking of supplies, inventory or records
- Covered property damage – Costs related to property damage and vandalism which occurred during 2020 public unrest and was not covered by insurance
- Covered supplier costs – Expenditures made by a borrower pursuant to a contract, order, or purchase order in effect prior to the date of disbursement of the PPP loan and for the supply of goods essential to the operations of the borrower’s business
- Covered worker PPE – Operating or a capital expenditure to facilitate the adaptation of business activities to comply with requirements established or guidance issued by the Department of Health and Human Services, the CDC, or the OSHA, during the period beginning on March 1, 2020 and ending on the date on which the national emergency declared by the President expires. Capital expenditures include installing a drive-thru window, air filtration system, health screening costs, and physical barriers such as sneeze guards.
Simplified application and other terms to note
- There will be a simplified application for loans of $150,000 or less, which the SBA needs to develop within 24 days
- The act repeals the requirement of PPP borrowers deducting the amount of any EIDL advance from their PPP forgiveness amount
- Includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees; first-time PPP borrowers who have recently been made eligible; and for loans made by community lenders.
Similar to the first round of PPP loans, the SBA will draft and issue guidance addressing changes made by the Consolidated Appropriations Act in the coming weeks. Additional information will be shared as we continue to become familiar with the bill.
If you have questions or concerns, contact our KerberRose Trusted Advisors today!