After months and months, Congress passed and President Trump signed a new law that provides for additional relief related to the COVID-19 pandemic. This law, named the Consolidated Appropriations Act, 2021 (CAA 2021), is over 5,000 pages long. Stimulus checks and payments are coming for some taxpayers. On the business front, CAA 2021 includes a new round of Paycheck Protection Program loans (PPP Second Draw Loans).
To some, the biggest gift of all is that, with respect to the first round of PPP loans and any PPP Second Draw loans, taxpayers are permitted to deduct ordinary and necessary expenses paid from the proceeds of PPP loans. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. The IRS subsequently asserted that these expenses were nondeductible. While that interpretation of the tax code may have been correct, many members of Congress stated this was not the intent of the CARES Act. Finally, with the passage of CAA 2021, businesses have certainty that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible. Taxpayers, accountants and advisors can breathe a sigh of relief.
As most already know, the CARES Act, passed in March 2020, established a very taxpayer friendly program, known as PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients so they could both maintain payroll during the COVID-19 pandemic and cover certain other expenses. Several modifications to the original program were passed and implemented since that time. Many taxpayers have started the process of applying for loan forgiveness and some have already received it.
CAA 2021 permits certain smaller businesses, which received a PPP loan and experienced a 25% reduction in gross receipts, to take a PPP Second Draw Loan of up to $2 million. Here are the key qualifying provisions:
To be eligible for a PPP Second Draw Loan, a business must:
- Employ no more than 300 employees per physical location;
- Have used or will use the full amount of their first PPP loan; and
- Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.
Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans' organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors and small agricultural cooperatives.
Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the prior calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP Second Draw Loans of up to 3.5 times the average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
The certification process for smaller loans has been simplified. Businesses that are applying for PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Non-profits and veterans' organizations may use gross receipts to calculate their revenue loss standard.
The forgiveness aspect is similar to the first round of loans. The PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income and, as stated above, expenses will be deductible.
Further, CAA 2021 extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness if the borrower reduces the number of employees retained, or reduces employees' salaries in excess of 25%.
Please contact our attorneys with any further questions you might have on PPP loans, or loan forgiveness.
Client alert authored by Mitchell D. Weinstein (312 855 4608), President, Chuhak & Tecson, P.C.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
