Congress approved a second round of PPP loans in 2021 called the Consolidated Appropriations Act. Included in its almost 5,600 pages is a second draw of forgivable Paycheck Protection Program (PPP) loans. The first round allowed loans to businesses with 500 or fewer employees. It also had allowances for loans to certain businesses with multiple locations, for which each location could not have more than 500 employees. Unfortunately, these allowances opened the door to some large businesses eating up the allocated funding. This shut out the smaller businesses that the loans were originally intended to help. Unlike the prior loan program, this round of loans is truly limited to small businesses that incurred revenue losses.
Second Round of PPP Loans – Eligibility Limitations
Eligibility is limited to businesses:
- with 300 or fewer employees per physical location;
- that had previously received a PPP loan; and
- that can demonstrate that they sustained at least a 25% reduction in gross receipts in the 1st, 2nd or 3rd quarter of 2020 relative to the same 2019 quarter. Businesses submitting an application on or after Jan. 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.
Eligible Entities
Eligible entities include the following:
- for-profit businesses,
- certain non-profit organizations,
- housing cooperatives,
- veterans’ organizations,
- tribal businesses,
- self-employed individuals,
- sole proprietors,
- independent contractors, and
- small agricultural co-operatives.
Churches and religious organizations are eligible for loans if they otherwise meet the requirements.
Loan Terms
The legislation establishes a maximum loan size of 2.5 times the average monthly payroll costs in the one year prior to the loan. Or the calendar year, up to $2 million. There is an exception for borrowers in the hospitality or food services industries. Borrowers in those industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs.
Loan Forgiveness
Full loan forgiveness is available if the borrower spends at least 60% of the second draw on payroll costs. (Just like like the first PPP loan). This includes additional group insurance payments, like vision, dental, disability and life insurance, and allowable nonpayroll costs of 40%.
Allowable Non-payroll Expense Category for Second Round of PPP Loans Now Includes:
- Operational costs – Payment for any business software or cloud-computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.
- Property damage costs – Include costs related to property damage, vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance.
- Supplier costs – Costs from existing contracts that are essential to the recipient’s operations, including the cost of perishable goods at any time.
- Protective materials and facility modifications – An operating or a capital expenditure made to facilitate the adaptation of an entity’s business activities to comply with requirements established or guidance issued by federal, state, and local governments during the period beginning on March 1, 2020, and ending on the date when the national emergency related to COVID-19 declared by the president expires.
A borrower may choose either an 8-week or a 24-week covered period.
Additional Terms for the Second Round of PPP Loans
Forgiveness Reduction
The rule reducing loan forgiveness for a borrower who reduced the number of employees retained and reduced employees’ salaries by more than 25% continues to apply.
Simplified Loan Forgiveness
The loan-forgiveness process is simplified for borrowers with PPP loans of $150,000 or less. This means another version of the SBA’s loan-forgiveness application form will be forthcoming. Congress has specified that it be a one-page certification that includes a description of the number of employees whom the eligible recipient was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
Borrowers using the simplified application form will be certifying that they meet the requirements for forgiveness. It’s a good idea to fill out a “draft” of the longer version of the form, as applicants are subject to penalties if they do not qualify. This will help substantiate certification. In addition, it’s good idea to retain this draft copy with the business’s employment and expense records. Be sure to keep employment records for 4 years. Keep all other records for at least 3 years after the date when the forgiveness request is submitted.
Deductibility of Expenses
The IRS recently issued a ruling essentially saying that because businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses paid from the forgiven loan aren’t deductible. However, Congress members have been saying all along that this was not the Congressional intent in the original PPP legislation.
Countering this, Congress has made it crystal clear that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan. And that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This applies retroactively to the first round of PPP loans as well.
Funds availability for the second round of PPP loans
The legislation requires the SBA to implement loans within 10 days after the bill was signed into law (12/27/2020). Also, for the program to continue through March 31, 2021.
Please give this office a call at 360-778-2901 if you have questions related to the PPP loan second draw.
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