The recently enacted budget legislation (“Act“) includes some important provisions affecting borrowers under the previously enacted Paycheck Protection Program (“PPP“) and allocates funding for a second round of small business PPP loans. We’ve previously written about the Paycheck Protection Program in 2020: Paycheck Protection Program Flexibility Act Does Indeed Provide Flexibility, Update on the Necessity Certification for PPP Loans, Loan Forgiveness Portal Opened by the Small Business Administration for PPP Loans.
For existing PPP borrowers and second round borrowers, the Act includes a provision that business expenses paid with PPP loan proceeds are fully tax-deductible, even if the PPP loan is forgiven. This law change overrides a prior IRS position which would have disallowed the deductions. The additional tax relief is welcomed by those businesses that are struggling because of the effects of Covid on their revenues. An additional benefit under the Act is that those PPP borrowers that also received a cash advance through the Economic Injury Disaster Loan program will not have to deduct the cash advance from their PPP loan forgiveness amount.
Under the Act qualifying businesses can receive a second round PPP loan. This includes both companies that received a first round PPP loan and those that did not. New to this round is loan eligibility for qualified 501 (c) 6 organizations. To qualify for the second round, a business must have 300 employees or less (down from 500 in the first round) and the business must be able to prove that it’s gross receipts in quarter one, quarter two or quarter three of 2020 decreased by at least 25% compared to the same quarter in 2019. If not operational in 2019, the business must use the first quarter of 2020 for this comparison.
The maximum loan amount under the second round is the lesser of $2 million (reduced from $10 million in the first round) or 2.5 times the average monthly payroll costs in the one year period prior to the loan application or in 2019. For restaurants, hotels and other businesses in NAICS class 72, the payroll multiplier is increased to 3.5 from 2.5. These second round PPP loans are available for applications received by March 31, 2021.
For second round loans, the covered usage period can be anytime between eight and 24 weeks from the date of disbursement of loan proceeds. For both first round loans (where forgiveness has not yet been applied for) and for second round loans, the Act expands the types of expenses that can be covered by PPP loan proceeds to add certain other operating expenses, certain property damage losses, payment for certain supplier costs and cost for covered workers protection, in addition to payroll, rent, mortgage interest and utility costs. To obtain full forgiveness, at least 60% of loan proceeds must be spent on payroll with the remaining 40% spent on the other eligible expenses just mentioned.
The forgiveness process for first and second round PPP loans was simplified in the Act for those loans less than $150,000. For these loans there is a one page certification form rather than a more detailed application. However, borrowers using the simple certification must nevertheless maintain all the backup documentation supporting the forgiveness application because the SBA has the right to audit their files for compliance.
If you have any questions regarding the issues discussed above or if you have any other Corporate & Business Law concerns, please contact the Underberg & Kessler attorney who regularly handles your legal matters or Steven Gersz, the author of this piece, here or by phone at (585) 258-2817.
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