On December 27, 2020 President Donald Trump signed into law the $900 billion Covid-19 relief bill passed by Congress on December 21, 2020.
The largest provision in the bill includes $325 billion in aid for small businesses that were heavily impacted by the pandemic. As part of this provision there will be a second round of Paycheck Protection Program (PPP) loans, which we’ll refer to as PPP2 loans. These PPP2 loans will be made available to both first-time qualified borrowers as well as to borrowers who received funds from the first round of PPP loans.
- The PPP2 Loans will be available through March 31, 2021.
- The loan amount cannot exceed $2 million. This is different from the first round of loans that had a maximum amount of $10 million.
- The loan amount is calculated based on 2.5 times the average monthly payroll costs in either the one-year period prior to the loan application or calendar year 2019. For borrowers with NAICS codes starting with “72” (i.e. businesses in the accommodation and food services sector), the loan is based on 3.5 times the average monthly payroll costs.
- The PPP2 loans are eligible for full loan forgiveness, provided at least 60% of the loan proceeds is spent on payroll costs over either an 8 week or up to a maximum 24 week period as selected by the borrower beginning on the date the loan proceeds are received.
- The definition for what is included in “payroll costs” is the same as for the first round of PPP loans with the same limitations applying, i.e. the annual salary cap of $100,000 prorated for the covered period.
- Eligible covered costs that may be paid for with PPP2 loan proceeds:
- Covered property damage expenses, which includes costs not covered by insurance or other compensation for property damage related to vandalism or looting due to public disturbances that occurred during 2020.
- Covered worker expenses, which includes any operating or capital expenditure to facilitate the adaptation of the business activities to comply with Covid-19 federal health guidelines.
- Covered supplier expenses, such as for the supply of goods that are essential to the borrower’s current operations at the time of purchase and pursuant to a contract or purchase order in effect at any time before the covered period.
- Covered operating expenses, such as software and cloud computing services and accounting needs.
- Borrowers will be able to deduct the expenses paid for with PPP2 loan proceeds even if they receive full loan forgiveness.
- The Small Business Administration has 10 days from the date the bill was enacted to issue regulations to implement the bill. The expectations are that banks could be ready to open their application process by mid-January.
Eligibility for first-time qualified borrower applicants:
Similar to the first round of PPP loan applications, borrowers will need to attest to the need for the loan and certify in good faith that the loan request is necessary. PPP2 applications will be permitted from the following first-time borrower groups:
- Businesses with 500 or fewer employees that would be eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including religious organizations.
- Accommodation and food service operations with fewer than 300 employees per physical location.
Eligibility for second-time qualified borrower applicants:
Businesses who previously received funds from the first round of PPP loans are eligible to apply, provided they meet all of the following criteria:
- They have 300 or fewer employees,
- They have or will use the full amount of the first round of PPP loan funds, and
- They can show they had a reduction in gross revenue of 25% or more in any quarter of 2020 compared with the same quarter in 2019. (Note if an applicant was not in operation during the first or second quarter of 2019, the applicant will compare their applicable 2020 quarter to the third quarter of 2019. If the applicant was not in operation during the third quarter of 2019, they will compare their applicable 2020 quarter to the fourth quarter of 2019. If the applicant was not in operation during the fourth quarter of 2019, they will compare their applicable 2020 quarter to their first quarter of 2020).
Borrowers that returned all or part of a previous PPP loan are permitted to re-apply for an amount equal to the difference between the amount retained and the maximum amount applicable.
Sec. 501(c)(6) business leagues, such as chambers of commerce, visitor’s bureaus, etc. and “destination marketing organizations” are also eligible for the PPP2 loans provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying, with lobbying costs not costing more than $1 million during the most recent tax year ending before February 15, 2020.
Additional restrictions regarding eligibility for the PPP2 loan:
- The entity must have been in business as of February 15, 2020 in order to show a reduction in gross revenue of 25% between quarters.
- Companies owned 20% or more by companies created under the Republic of China or have significant operations in the Special Administrative Region of Hong Kong are not eligible for the PPP2 loan.
- Entities that retain a member of the board of directors with a person who is a resident of the People’s Republic of China are not eligible for the PPP2 loan.
- Agents representing the interests of foreign powers in a “political or quasi-political capacity’ that are registered under the Foreign Registration Act of 1938 are not eligible for the PPP2 loan.
- Entities that receive a grant under the new Shuttered Venues Operators program also are not eligible for the PPP2 loan.
Extension of the Employee Retention Tax Credit and how it interrelates with the PPP Loans:
The new legislation includes some major changes to the Employee Retention Credit (ERC), some of which are effective retroactively. It also extends the ending date from December 31, 2020 to June 30, 2021.
Under the original provisions:
- Employers could qualify for a fully refundable tax credit equal to 50% of qualified wages paid to employees from March 12, 2020 through January 1, 2021 up to a maximum amount of qualified wages for each employee for all calendar quarters of $10,000. Therefore, the maximum credit amount an eligible employer could claim for each employee was $5,000.
- Employers were eligible for the credit if either:
- there was a reduction in gross receipts of 50% for a quarter in 2020 compared to the same quarter in 2019 (the qualifying period ends when quarterly gross receipts then exceed 80% of gross receipts for the same calendar quarter in 2019), or
- there was a full or partial suspension of the business due to a government order.
- Only employers with more than 100 employees could qualify for the credit, and the credit could only be taken for employees who were not providing services, i.e. employees who had been furloughed or had a reduced working schedule but were still being paid their full rate. Also, employers could not qualify for both the ERC and a PPP loan and were forced to choose one or the other to apply for.
Under the new legislation the following changes are in effect:
- Employers can claim the ERC even if they received a PPP loan. However, qualifying wages do not include those that were paid for with forgiven PPP loan proceeds, so there is still no double dipping. The ordering rule for determining where to apply wages is that wages are first counted toward the ERC before being eligible for PPP loan forgiveness, however, employers can elect to apply the wages towards PPP loan forgiveness first instead. Further clarity is needed as to whether having already submitted a PPP loan forgiveness application constitutes having made such an election. It is also unclear how employers who would have been eligible for the ERC for 2020 can go back and claim the credit. I.e. Whether they will be expected to file amended Forms 941X, or if the calculation would be run through the current quarter Form 941.
- Tax exempt entity gross receipts are determined under IRC 6033, i.e. this was clarified to be the amount reported on Form 990.
- Group health plan expenses not included in an employee’s gross income may be treated as qualified wages. This clarifies that amounts paid for group health care costs are qualified wages even if no other form of wages were paid to the employee.
Effective as of January 1, 2021 through June 30, 2021 (Not Retroactively):
- The amount of the credit increases from 50% of qualified wages up to a cap of $10,000 for all calendar quarters to 70% of qualified wages up to a cap of $10,000 for each calendar quarter. This makes the maximum credit amount an employer can claim for each employee $14,000 (for the first two quarters of 2021).
- The gross receipts test no longer requires a decrease in gross receipts from the same quarter in the previous year of 50%. For 2021, the gross receipts test is met if the gross receipts for that quarter are less than 80% of the same quarter in 2019 (not the previous year, which would be 2020). If the business was not in existence for the comparison quarter of 2019, the same quarter in 2020 may be substituted. In addition to this a safe harbor has been added, allowing employers to elect to use prior quarter gross receipts to meet the test.
- Previously if an employer had more than 100 full time equivalent employees (FTE) in 2019, only wages paid to employees who were not providing services were considered ‘qualified wages’. From January 1, 2021 through June 30, 2021, the threshold increases from 100 to employers with 500 or fewer FTE.
- The new legislation removes the 30-day wage limitation rule, which previously capped qualified wages paid to any employee at what the employee would have been paid for working an equivalent duration during the previous 30-day period. The removal of this limitation allows employers to claim the credit for bonuses paid, up to the $10,000 cap per quarter.
- New legislation was added that permits small employers to receive the credit in advance. For employer with fewer than 500 FTEs, they may elect to receive an advance payment of the credit for that quarter capped at 70% of the average quarterly wages paid by the employer in 2019.