Published By Janet Gershen-Siegel at January 29th, 2021
After a lot of deliberations and last-minute changes, it appears the second round of PPP loans is getting approval. However, this information is still in flux. So be sure to check on the SBA website for the latest information. See sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
Congress gave approval to a $900 billion COVID-19 relief package. Included in that amount is $284 billion for a second round of the Paycheck Protection Program (PPP). Guidance and regulations related to this second round of PPP have not yet been issued. The SBA must provide these regulations within 10 days of the enactment of the Act. See natlawreview.com/article/paycheck-protection-program-round-2-highlights.
The new relief package includes additional funding for new loans, the ability to get a second PPP loan for small businesses facing significant revenue declines in any 2020 quarter compared to the same quarter in 2019, clarifications providing for the deductibility of business expenses paid with forgiven Paycheck Protection Program loans. So this is a material change from existing IRS guidance.
It also includes loan eligibility for Section 501(c)(6) not-for-profit organizations for the first time, $15 billion for live venues, independent movie theaters and cultural institutions, and $20 million for the Economic Injury Disaster Loan Program.
The Second Draw of PPP loans are available to borrowers that previously got a PPP loan. Second Draw loans are only for businesses that employ no more than 300 employees (down from 500). Or they must meet an alternative size standard, or have used the entire amount of their first PPP loan or will use such amounts. Plus they must had gross receipts during Q1, Q2 or Q3 2020 at least 25% less than the gross receipts from the same quarter in 2019. Applicants may use Q4 2020 if they apply after January 1, 2021.
If the business was not in operation for some of 2019, then comparable quarters may be different. The limitations for Second Draw loan eligibility do not apply to first-time borrowers.
This required all borrowers to certify that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” as of the date on which the PPP loan application is submitted. There should be further guidance on this issue in the coming weeks.
Borrowers of a Second Draw PPP loan have an option to calculate the maximum loan amount by multiplying the borrower’s average total monthly payroll in the one-year period before the date on which the loan is made, or calendar year 2019, by 2.5 times. The maximum loan amount is down from $10 million in the first round to $2 million. Like the first round, seasonal employers calculate their maximum loan amount differently. Note that the $2 million cap does not apply to first-time borrowers. Their cap remains at $10 million.
Borrowers of a Second Draw PPP loan that have NAICS Code 72, can use a 3.5x multiplier of their average monthly payroll costs to calculate their maximum loan amount. This is subject to the $2 million cap. These are typically restaurants and hotels.
The covered period is the time when a borrower must use the funds to qualify for forgiveness. Originally the SBA provided that this would be an eight-week period starting on the date borrower received the loan proceeds. But in later amendments, it expanded to 24 weeks. Borrowers can now choose the length of their covered period, so long as it is at least 8 weeks and is no longer than 24 weeks. This change gives borrowers more control over how to handle potential reductions in workforce once PPP funds are gone.
Congress expanded the types of expenses for which businesses can use all PPP loans. This applies to existing PPP loans, except if there’s already forgiveness, and new loans. This is in addition to payroll, rent, covered mortgage interest and utilities.
These expenditures can include payments for business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, HR and billing functions, or account or tracking of supplies, inventory, records, and expenses.
The second round of Paycheck Protection Program loans now covers costs related to property damage, and vandalism or looting, due to public disturbances that occurred during 2020, not covered by insurance or other compensation.
The second round now covers expenditures to a supplier of goods essential to the operations of the entity when the expenditure was made. And it is made pursuant to a contract or order in effect at any time before the covered period or, with respect to perishable goods, in effect at any time during the coverage period.
These expenditures include operating or capital expenditures allowing a business to comply with requirements or guidance issued by the CDC, HHS, OSHA or any state or local government, during the period from 3/1/20 to the date when the national emergency declared by the president expires, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.
These expenses appear to include PPE, physical barriers that were put in place, expansion of indoor/outdoor space, ventilation or filtration systems, and drive-through windows.
PPP loans will not be a taxable income inclusion. Expenses paid with the proceeds of a forgiven PPP loan are now tax-deductible. This covers not only new loans but also existing and prior Paycheck Protection Program loans. This reverses previous guidance from the Treasury and IRS, which did not allow deductions on expenses paid via PPP proceeds. In addition, any income tax basis increase that results from the borrower’s PPP loan will remain even if the PPP loan is forgiven.
Before the passage of the new Act, borrowers receiving an EIDL Advance (advances between $1,000 and $10,000) had that amount subtracted from their total forgiveness. This is in effect had the effect of repaying the EIDL Advance. The Act now provides that EIDL Advances will not reduce PPP loan forgiveness. The SBA says that borrowers that already got forgiveness and had their EIDL Advance deducted from it may be able to amend their forgiveness applications. Further guidance should be forthcoming.
The SBA is simplifying these to a one-page certification. This certification includes a description of the number of employees the eligible recipient was able to retain because of the loan. Plus it includes the estimated total amount of the loan spent on payroll costs, and the total loan amount.
While the forgiveness application is changing, all of the rules still apply. Rather than going through the process of showing how borrowers came to certain numbers, the new application merely asks borrowers to self-certify. Given the liability attached to making a false certification to the SBA, all borrowers who choose to submit this simplified application should check their responses. They can do so by at least filling out, in draft form, the long-form application. This is to ensure that the certifications made on the newer form are true and correct.
All borrowers must retain all employment records relevant to the forgiveness application. This is for a period of four years following the date of submission. They must also keep all other records relating to PPP and the forgiveness application, for three years after submitting the forgiveness application.
These organizations generally consist of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues. Such organizations must not be organized for profit. And no part of their net earnings can be to the benefit of any private shareholder or individual.
These organizations are generally expected to be eligible if they do not receive more than 15% of receipts from lobbying activities. Plus lobbying activities cannot comprise more than 15% of the organization’s total activities. And the cost of lobbying activities cannot be more than $1 million during the tax year ending 2/15/20. Plus the organization cannot employ more than 300 employees.
Borrowers in bankruptcy will be eligible to apply. These new loans will be treated in the borrower’s bankruptcy case as administrative claims. To the extent not forgiven, they must be paid in full in any Chapter 11 cases. And they are not subject to cramdown. A cramdown is the imposition of a bankruptcy reorganization plan by a court despite any objections by certain classes of creditors. This is a significant change since the first round of PPP lending.
FYI, the COVID-19 relief bill grants borrowers in the Paycheck Protection Program tax-free forgiveness of the loan. And there is the ability to deduct covered expenses. But that comes with a big question. Whether states will permit those write-offs, along with tax-free forgiveness, remains up in the air. That means businesses may still face surprise taxes on their state tax returns. However, small businesses may decide to go on extension when they file their 2020 taxes next year.
States may choose to comply with federal tax law as of a specific date. Hence the PPP second round and its tax law changes may come too late for some business owners. Since many states and municipalities are hurting for tax revenue, this may be a place where they go for additional funding. See cnbc.com/2020/12/29/small-mom-and-pop-businesses-that-took-ppp-loans-may-face-a-tax-bomb.html.
Even as there may be tax issues, some states are stepping up and offering funding to save local businesses. For example, in Massachusetts, Gov. Charlie Baker announced a $668 million program to provide help for small businesses affected by the pandemic. The program offers grants of up to $75,000 or three months of operating expenses. See wcvb.com/article/massachusetts-governor-baker-covid-pandemic-business-support-announcement-december-23-2020/35057186.
Small businesses can apply for some extra relief as part of a $500 million grant program the state is offering. Grants will vary from $5,000 to up to $25,000 in the state’s Small Business COVID-19 Relief Grant Program. Non-profit organizations will also be eligible for the program. Businesses can use funds from the grant to pay for rent, utilities, resources, employee expenses and other relevant costs. See nbcsandiego.com/news/local/california-small-businesses-can-begin-to-apply-for-500-million-covid-19-grant-program/2483045.
Gov. Wolf gave approval to $145 million for Pa. businesses. This is in the form of a funds transfer from the Workers’ Compensation Security Fund at the Pennsylvania Insurance Department. The state legislature will appropriate it into grants for businesses whose operations and revenue were significantly hurt by the pandemic. See nepascene.com/2020/12/gov-wolf-approves-145-million-pa-businesses-urges-congress-provide-covid-19-relief.
Gov. Whitmer signed a $106 million COVID-19 relief bill. This relief bill includes $55 million for small businesses. However, vetoes cut more than half of funding, including for the Unemployment Insurance Trust Fund. Extended unemployment benefits may be jeopardy unless appropriations can get approval to come from elsewhere. See crainsdetroit.com/government/whitmer-signs-106-million-covid-19-relief-bill-vetoes-cut-more-half-funding.
With a hybrid credit line, you can fund your business without putting up collateral. You only pay back what you use. Your personal credit score should be at least 685. In the past 6 months you should have fewer than 5 credit inquiries. And you should have fewer than a 45% balance on all business and personal credit cards.
To qualify, you can’t have any liens, judgments, bankruptcies, or late payments. It’s better if you have established business credit as well as personal credit. But if you do not meet all the requirements, you can take on a credit partner.
The details on the second round of PPP loans are still under consideration. But some aspects are clear, such as: nonprofits are eligible. And there is a financing cap for second round loans if you already got a PPP loan. Plus there will be federal tax forgiveness. But there might not be local or state tax forgiveness. A terrific alternative to a PPP loan (first or second) is a Credit Line Hybrid. Contact us today and find out if you qualify, and how much your business can get.