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.
Who is Eligible for the Second Round of PPP Loans?
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:
- has 300 or fewer employees per physical location.
- had previously received a PPP loan and have spent all the first round PPP funds; and
- can demonstrate that they sustained at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Businesses applying on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.
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.
What are the Terms of the Second Round of PPP Loans?
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%.
How Will Loan Forgiveness Work for the Second Round of PPP Loans?
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:
- 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 and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
- 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 few additional notes on the loan forgiveness:
- A borrower may choose either an 8-week or a 24-week covered period.
- 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.
- The loan-forgiveness process is simplified for borrowers with PPP loans of $150,000 or less. A new one-page loan forgiveness form (Form 3508S) was released on January 19, 2021 which includes certifications and key loan information.
- Based upon the brevity of the form, we would recommend borrowers using the simplified application form be familiarized with the requirements for loan forgiveness, which is found in the longer form, to prevent any misleading information from being erroneously submitted through the loan forgiveness process. Please keep in mind the legislation requires employment records to be kept for four years and for other records to be kept for three years after the date when the forgiveness request is submitted.
Will Expenses Be Deductible?
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.
When Will the Funds Become Available?
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.