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On January 19, 2021 additional guidance was released to assist borrowers in applying for the second round of PPP loans. These loans became available based upon legislation passed by Congress and signed by President Trump in late December and included in the Consolidated Appropriations Act of 2021. The first round allowed loans to businesses with 500 or fewer employees and to certain businesses with multiple locations, for which each location could not have more than 500 employees. Congressional intent with the second round of PPP loans was to put additional requirements in place to specify a more targeted group of eligible businesses.
Unlike the prior loan program, this round will be limited to small businesses that incurred revenue losses. Eligibility is limited to businesses that satisfy the following:
The eligible entities include 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, and the legislation prevents future administrations from making them ineligible.
The legislation establishes a maximum loan size of 2.5 times the average monthly payroll costs for the twelve months prior to the loan, or the calendar year 2019, up to $2 million. Since loan applications are being prepared in January, borrowers are able to use calendar year 2020 for the twelve-month prior clause. There is an exception for borrowers in the hospitality or food services industries, who may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Loan amounts that are not forgiven will be subject to a 5-year maturity and will incur interest at 1%.
Like the first PPP loan, full loan forgiveness is available if the borrower spends at least 60% of the second draw on payroll costs (this time including additional group insurance payments, including vision, dental, disability and life insurance), with allowable nonpayroll costs of 40%.
The allowable non-payroll expense category – which was originally limited to rent, mortgage interest, and utilities – has been expanded to include the following:
A few additional notes on the loan forgiveness:
Congress recently passed legislation that taxpayers whose PPP loans are forgiven are allowed deductions for deductible expenses paid using PPP loan proceeds. In addition, 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.
The legislation requires the SBA to prepare regulations and implement the second-draw PPP within 10 days after the bill was signed into law (December 27, 2020) and for the program to continue through March 31, 2021.
If you did not receive a PPP loan yet, you still have time. Use Form 2483 to apply for round one of the PPP loan. For this loan you would not be subject to the revenue reduction eligibility requirements and the rules governing would include those enacted under the first round of funding.
If you have any questions about the second round of PPP loans, please contact Cray Kaiser today. We’re here to help.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.