Since the creation of the Paycheck Protection Program (PPP) with the enactment of the CARES Act, we have characterized the PPP as a government grant in the form of a forgivable loan. Congress has now reaffirmed the grant treatment with the Consolidated Appropriations Act, 2021 (CAA21), which includes significant and beneficial modifications to the PPP, further demonstrating Congressional intent that a PPP loan is, and has always been, a grant.
We previously discussed a preview of these changes and with the adoption of the 5,500+ age bill, we can summarize certain key changes to the PPP in the CAA21.
Deduction for Expenses That Result in Forgiveness
After much bipartisan opposition to the IRS’ adamantly held position that a PPP borrower may not claim a deduction for otherwise deductible costs that result in PPP loan forgiveness (discussed in a prior article), Congress has now expressly overridden the IRS position. PPP borrowers may claim an otherwise allowable deduction or other tax benefit (e.g., depreciation) for expenses that result in PPP loan forgiveness.
Expansion of Expenses That Result in Forgiveness
PPP borrowers originally could obtain PPP forgiveness for four types of expenses paid or incurred during the covered period: payroll costs, mortgage interest, rent and utilities. However, some businesses did not pay or incur enough forgivable costs to obtain full PPP loan forgiveness, usually because of the shutdown or substantial curtailment of operations resulting from the pandemic. To address this, Congress has added four additional types of forgivable expenses:
- Operations Expenditures: defined as “a 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: defined as “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”
- Covered Supplier Costs: generally includes amounts paid for the supply of goods that are (a) essential to the business and (b) made pursuant to a contract, order or purchase in effect before the covered period. The scope of covered supplier costs appears quite broad, and generally appears to include tangible property such as office supplies, computers, materials resold to customers, etc. It is unclear, however, if services (e.g., legal fees) qualify as “goods.”
- Covered Worker Protection Expenditures: generally includes amounts paid to comply with COVID-19 guidance for employees working remotely.
In addition to adding these four types of new forgivable expenses, Congress also amended the definition of “payroll costs” to more clearly include group life, disability, vision or dental insurance. We previously advised clients that they could include vision and dental insurance as part of health care benefits. The inclusion of group life and disability were less clear. Even more favorable, Congress added group life, disability, vision and dental insurance to the items not subject to the $46,154 cap that otherwise applies to employees (other than owner-employees subject to the special owner-employee limitation that we previously have discussed).
Second PPP Loan
Certain businesses may apply for a second forgivable PPP loan. Eligibility is restricted to businesses with (i) fewer than 300 employees (including sole proprietorships) that (ii) experienced a reduction of 25 percent or more in gross revenue in any quarter in 2020 when compared to the same quarter in 2019. Like the original PPP loan, the amount of the second PPP loan equals 2.5 times 2019 payroll (a borrower also may use 2.5 times the payroll for a 1 year period before the date of the second PPP loan). However, businesses using a North American Industry Classification System (NAICS) code beginning with 72 (generally hotels and restaurants) can use a multiplier of 3.5. Also, a second PPP loan is capped at $2 million.
Simplified Forgiveness Application for PPP Loans Up to $150,000
As many of our readers know, completing a PPP loan forgiveness application (Form 3508) can be a difficult and arduous task — especially the FTE calculations. As we discussed in this article, the SBA simplified the process for PPP borrowers with PPP loans $50,000 or less. Congress has expanded this simplified process to PPP loans of up to $150,000, materially easing the administrative burden on the majority of borrowers. We fear that some of these borrowers are destined for future legal challenges because, although they do not have to provide all computations justifying entitlement to forgiveness in a signed forgiveness application, they still have to certify such entitlement. Accordingly, we recommend that borrowers relying on the simplified process still confirm entitlement to full forgiveness and preserve their work papers in the event the SBA requests documentation supporting the certifications.
Flexibility for Picking the Covered Period
The Flexibility Act originally extended the covered period for incurring forgivable expenses from eight weeks to 24 weeks. However, it still only left borrowers with these two alternative options. Congress has now provided flexibility for the covered period. PPP borrowers can choose a covered period of any period between eight and 24 weeks from loan origination. Of course, now that everyone’s 24-week period for the first PPP loan has ended, we imagine many borrowers will use a 24-week period so as to not leave any money on the table. However, borrowers who had material changes in their business such as a substantial drop in FTEs late in their 24-week covered period could find this change extremely beneficial. Similarly, a covered period of less than 24 weeks may impact how the business answers the uncertainty certifications questionnaire (SBA Form 3509 (For-Profit Borrowers) or (Non-Profit Borrowers)). Further, we expect that many obtaining a second PPP loan will take advantage of this flexibility.
Increase to Prior PPP Loan
The rules for the PPP have changed over time, with those changes sometimes making things more restrictive and sometimes easing those restrictions. For example, on April 23, the Small Business Administration (SBA) updated the PPP loan FAQs to add FAQ 31, which reinterpreted the uncertainty certification and invited all PPP borrowers to return their PPP loan no questions asked by May 7 (later extended to May 14). Many PPP borrowers with PPP loans under $2 million returned their PPP loan because of fears about the uncertainty certification. However, on May 13, the SBA added FAQ 46 which, in part, deemed any PPP borrower with a loan of less than $2 million to have made the uncertainty certification in good faith. A similar issue arose for partnerships, many of which applied for PPP loan without including partner compensation, only to later learn that the SBA interpreted payroll costs to include partner compensation. Congress has instructed the SBA to issue rules within 17 days of the enactment of the CAA21 to allow borrowers to receive an increase in their PPP loan. This increase will be available only to borrowers that have not had their PPP loan forgiven (it will be available to borrowers who have submitted a PPP loan forgiveness application, as long as the SBA has not acted on that application).
Expansion of PPP Loan Eligibility
Congress expanded the list of eligible businesses to include Section 501(c)(6) businesses (such as chambers of commerce) with not more than 300 employees, subject to limitations for 501(c)(6) businesses that cross certain lobbying thresholds. Congress also clarified that individual stations, newspapers and public broadcasting organizations with no more than 500 employees generally are eligible.
Repeal of Reduction in Forgiveness for EIDL Advance
The CARES Act reduced PPP loan forgiveness by the amount of an Emergency Injury Disaster Loan (EIDL) advance received by the borrower. As we discussed in this article, the SBA stated in the Interim Final Rule on the PPP loan forgiveness process that “SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender as required by section 1110(e)(6) of the CARES Act.” Congress has repealed this reduction in PPP loan forgiveness.
The CAA21 requires SBA to issue regulations to carry out the changes to the PPP effected by the CAA21 “[n]ot later than 10 days after the date of enactment.” Accordingly, we expect a flurry of new regulations, similar to what we saw during the summer. Stay tuned.