New Legislation for PPP Loans
By: Deb Walker, John Carpenter and Evan Usry
The most recent COVID-19 relief package increases the availability of PPP loans by providing that certain borrowers can avail themselves of another loan of up to $2 million which can be forgiven. In addition, there are a number of tax provisions, including the ability to deduct the expenses used for loan forgiveness and an expansion of the Employee Retention Credit to businesses who received PPP loans.
Expenses Used for Loan Forgiveness
The president is expected to sign legislation making clear that expenses used for the forgiveness of PPP loans are deductible and the forgiveness of indebtedness remains nontaxable. For partnerships and S corporations, the amounts are treated as tax-exempt income. To the extent possible, taxpayers should adjust estimated tax payments to reflect this change in law. This will apply to existing and new PPP loans.
Second Draws of PPP Loans
Current borrowers with no more than 300 employees and gross receipts in the first, second or third quarter of 2020 that were at least 25 percent less than during the same quarter of 2019 can apply for a second loan. If the loan application is filed after December 31, 2020, then the fourth quarter comparison can be used for comparison with the 4th quarter of 2019. Special rules apply if the organization was not in business in those quarters. The eligible loan amount will be two and a half times a borrower’s average monthly salary (three and a half months for borrowers in the hospitality industry) in the year prior to the loan or the calendar year, up to $2 million. Special rules apply to seasonal employers.
In counting the 300 employees, the rule allows the hospitality industry to count the employees by geographic location. In addition, this new program is available to certain IRC Section 501(c)(6) organizations, news organizations (e.g., newspapers, broadcasters and radio stations) with no more than 500 employees per physical location, destination marketing organizations, and housing cooperatives. These loans are not available to shuttered venues (e.g., theaters, concert halls) that receive a grant available to such entities. The forgiveness provisions relevant to the first draw loans will be applied in determining second draw loan forgiveness.
Employee Retention Credit Expansion
Under prior law, PPP loan borrowers were not eligible for employee retention credits. The new law allows PPP borrowers to claim these credits for eligible wages that were not used for loan forgiveness. This is a significant benefit for eligible employers, especially those with 100 or fewer full time employees. The credit can be retained from payroll tax deposits that would otherwise be made, providing an immediate cash benefit to employers. This will require amended quarterly employment tax returns for 2020.
An employee retention credit is a payroll tax credit equal to 50 percent of up to $10,000 in wages and health benefits paid to certain employees of eligible employers. An eligible employer is one who has had a full or partial suspension of operations due to a government order limiting commerce, travel or group meetings due to COVID-19 or who experienced a significant (i.e., 50 percent or more) decline in gross receipts during a calendar quarter in 2020 compared to the same calendar quarter in 2019. Eligible wages for employers averaging 100 or fewer full-time employees in 2019 are all wages and health benefits paid up to the $10,000 limit. Eligible wages for employers with more than 100 full–time workers in 2019 are wages and health benefits paid to workers who are not providing services due to an economic hardship because of the partial or full suspension of operations or the decline in revenue.
For wages paid between January 1, 2021, and June 30, 2021, the employee retention credit becomes even more beneficial. For these wages, the credit amount is increased to 70 percent and the wage limit is increased to $10,000 per quarter per employee. In addition, to be eligible for the credit, the significant decline in revenue is changed to 20 percent, with employers eligible to use the prior quarter for determining eligibility. Finally, eligible wages are any wages paid by an eligible employer with 500 or fewer employees. The credit is also expanded to apply to certain governments. Taxpayers need to determine if they have had a suspension of operations or a significant decline in gross receipts as soon as possible to know if they can benefit from this credit in 2021 and realize the cash flow benefits as soon as possible.
Calculation of Forgiveness Amounts
The expenses which can be used for loan forgiveness are expanded, for those whose loans have not been forgiven, to include software, cloud computing and other human resource and accounting expenses, property damage costs due to 2020 public disturbances that were not covered by insurance, supplier costs that were obligated to be paid before the loan that are essential to the borrower’s operations and expenditures for worker protection (e.g., masks and other personal protection equipment). For all loans, fringe benefits which can be counted as payroll costs for loan forgiveness are expanded to include disability insurance and group term life insurance costs. Economic Injury Disaster Loan (“EIDL”) advances will no longer reduce a borrower’s forgiveness amount. The SBA will issue rules that ensures borrowers are made whole if they received forgiveness and their EIDL was deducted from their forgiveness amount.
While a borrower could always choose to apply for forgiveness before the end of the 8- or 24-week covered period, under prior law the covered period did not change which meant that the calculation of full-time equivalents had to be for an 8- or 24-week period and salary or hourly wage reduction amounts had to include the total period. Congress is now allowing a borrower to define the covered period as ending on any date before the end of the covered period. This allows borrowers more flexibility in calculating full time equivalents and required salary or hourly wage reduction amounts. Special calculation rules also apply to farmers and ranchers.
Borrowers who returned all or part of their PPP loan will be able to reapply, under guidance to be issued to lenders within 17 days of enactment. This provision also allows borrowers to increase loan amounts which would have been larger due to regulations issued after the loan application was made. This will assist seasonal businesses who applied using annual and not seasonal wages and whose banks refused loan increases based on regulations released after the loan was issued. A seasonal worker is defined as one who operates no more than seven months a year or earned no more than a third of its receipts in any six months in the prior calendar year.
Simplified Forgiveness Applications for Loans of Not More Than $150,000
Within 24 days after enactment, the SBA is required to release a one page certification form on which a borrower is required to provide a description of the number of employees able to be retained because of the loan, the estimated amount of the covered loan spent on payroll costs and the total loan value. No other documents need to be submitted. This certification must be attested to as accurate and the borrower needs to attest that it has complied with the loan requirements. Employment records are required to be maintained for four years after the forgiveness application is submitted. Records of other expenses used for loan forgiveness only need to be retained for three years following the loan submission. The law specifically provides that these loans can still be audited and adjusted for fraud, ineligibility and other material noncompliance. This new simplified forgiveness application applies to loans made before, on, or after the date of enactment.
SBA Audits of PPP Loans
Congress is directing the SBA to submit an audit plan detailing its policies and procedures for conducting forgiveness reviews and audits and the metrics used to determine which loans will be audited within 45 days of enactment of this law. Within 30 days after that, the SBA will need to begin monthly reports to Congress regarding the number of active reviews and audits of PPP loans, the number of such reviews that have been going on for more than 60 days and any substantial changes to the audit plan previously submitted. These releases will enable borrowers to better understand the audit process.