January 5, 2021
The Consolidated Appropriations Act (“CAA”) signed into law on December 27, 2020, included several business relief provisions and had a notable effect on PPP and EIDL funding. The CAA includes a variety of tax provisions, extensions and modifications to both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL), which are administered by the Small Business Administration (SBA). While more guidance is needed from the Treasury and IRS, which could alter current interpretations of the CAA, this article provides additional information and understanding on the CAA’s effect on PPP and EIDL funds.
The CAA made changes that affect existing loans made under the CARES ACT as well as created provisions for new first or “second draw” PPP loans. Most of the provisions in the original CARES Act loan program remains in place in the newly passed CAA. For simplicity, in this article original loans under the CARES Act are referred to as “PPP1” and new loans under the CAA as “PPP2.”
Provisions applicable to PPP1 and PPP2 loans
For PPP1 loans not forgiven by December 27, 2020, the CAA enactment date, the rules have been modified to make full forgiveness simpler and more likely. In addition, the CAA permits borrowers to borrow more under the PPP1 loan if they either (a) repaid some of the funds or (b) did not accept the maximum funds offered in the loan application.
The CAA clarifies the period over which the loan funds must be expended to qualify for forgiveness (the loan “covered period”). Under this new provision, borrowers can elect a covered period, which starts on the date the loan funds are deposited and ends on a date that falls between eight and 24 weeks after that date. Under the CARES Act and subsequent legislation, borrowers had either an eight or 24-week covered period, nothing in between, creating some uncertainty on how to calculate loan forgiveness. Now borrowers can effectively choose their own covered period between these dates and calculate loan forgiveness amounts accordingly.
The requirement that at least 60% of the total expenditures be for payroll costs still applies. Payroll costs include compensation (up to $100,000 annually per employee), employer contributions to retirement plans and group health plans, and any state and local employment taxes paid by the employer (e.g., NC unemployment tax). The CAA broadened this definition to specifically include the cost of group life, disability, vision and dental insurance. Remember, only the costs funded by the employer can be considered; employee withholdings do not count as payroll costs.
In addition to payroll costs, certain mortgage interest, rent and utilities costs are eligible expenses. The CAA also added a few new categories of eligible expenses:
- “Covered operations expenditures” – these are for software or cloud computing services that facilitate various business operations, including product or service delivery, payroll, inventory and supplies tracking, and other recordkeeping and accounting functions.
- “Covered property damage costs” – these are costs not covered by insurance or other compensation related to property damage, vandalism or looting due to public disturbances that occurred during 2020.
- “Covered supplier costs” – these are costs that were essential to business operations at the time the expenditure was made and that were incurred under a contract, order or purchase order before the loan was funded. In the case of perishable goods like food, costs incurred during (not only prior to) the loan’s covered period can also be considered.
- “Covered worker protection expenditures” – these are costs that facilitate adaptation of business activities to comply with various federal, state, and local laws starting March 1, 2020. This includes modifications to drive-through windows; air ventilation and filtration; expansion of indoor, outdoor or combined space; adding or modifying health screening capabilities; physical barriers such as sneeze guards and other personal protective equipment. Costs to modify residential property or create intangibles do not qualify.
Provisions applicable to PPP2 loans
The items discussed above are relevant to both existing and new PPP loans. The CAA provides for a new round of PPP loans, either initial loans or so called “second draw” loans for those that received a PPP1 loan.
Eligibility criteria for this second round of loans have been modified significantly. Generally, any business concern, nonprofit organization, veterans organization, tribal business concern, self-employed individual, sole proprietor, independent contractor or small agricultural cooperative is eligible. Nonprofit associations qualifying under Section 501(c)(6) of the Internal Revenue Code, such as chambers of commerce, were specifically added by the CAA.
For a business to be eligible, it must satisfy the following criteria:
- It must have been in operation on February 15, 2020.
- The business must employ no more than 300 individuals.
- The business has used or will use the full amount of their PPP1 loan, if any; AND
- Their gross receipts must have decreased by at least 25% during any quarter of 2020 as compared to that same quarter in 2019.
In addition, the business cannot have received a grant as a “shuttered venue operator.” A shuttered venue operator is a specific category of business eligible for special federal grants, including live venue operators or promoters, theatrical producers, live performing arts organization operators, relevant museum operators, motion picture theatre operators, and talent representatives.
Eligible businesses can generally receive PPP2 loans equal to 2.5 times their average monthly payroll that was paid either during 2019 or the one-year period preceding the loan, up to a maximum loan amount of $2 million. Seasonal employers must use the average monthly payroll during any 12-week period between February 15, 2019 and February 15, 2020. The borrower can choose which period to use.
Businesses in the accommodations and food services sector (identified by the North American Industry Classification System – NAICS – prefix 72) will use a multiplier of 3.5 instead of 2.5 for determining their loan amount. This sector includes hotels, motels, bed and breakfast establishments, RV parks, restaurants, bars, and caterers. The maximum loan amount is still fixed at $2 million.
Economic Injury Disaster Loans (EIDL)
The CAA also made funds available for additional EIDLs to help businesses dealing with the effects of COVID-19.
In the previous round of COVID-EIDL funding, grants were provided for $1,000 per employee, up to a total of $10,000; these did not have to be repaid. The CAA provides that existing EIDL grant recipients that received less than $10,000 can now get the difference, ensuring all recipients receive the maximum of $10,000. The bill requires the SBA to notify those who received a previous EIDL grant as well as those who applied but did not get a grant because funds were exhausted. The SBA is expected to release information on the process for securing these additional funds soon.
Under the CARES Act, the receipt of an EIDL grant serves to reduce the amount of the PPP loan forgiveness, resulting in that grant amount having to be repaid. The CAA eliminated this provision. It is unclear if PPP funds already repaid under the CARES Act provision will be returned to borrowers.
New EIDL grant applicants must meet the following criteria:
- Must be located in a low-income community (guidance is needed).
- Must have suffered an economic loss of greater than 30%.
- Must employ 300 or fewer individuals.
- Must have been in operation by January 31, 2020; AND
- Must have been directly affected by COVID-19.
Tax impact of PPP, EIDL and loan relief
In April of 2020, the IRS concluded that expenses paid with forgiven PPP loan funds are not deductible. The CAA overrode that conclusion and provides that “no deduction shall be denied.” This means that not only is the income from PPP loan forgiveness tax-free, but the associated expenses paid with those funds that gave rise to the forgiveness are deductible, assuming they meet the usual requirements for deductibility.
The CAA also provides that taxable income does not include EIDL grants or certain loan repayment assistance. This includes instances in which the SBA made six months of “payments” of principal and interest on existing SBA loans on behalf of borrowers, a provision enacted as part of the CARES Act.
In addition, the CAA gives the Treasury Department authority to waive information filing requirements (e.g., Forms 1099) for any of these amounts excluded from taxable income. Current guidance requires banks and other lenders to report such amounts on Forms 1099, which could lead to confusion as to the correct tax reporting.
Additional guidance is expected in the coming days.
Click Here to read previous JPS article on the Consolidated Appropriations Act, 2021.
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