On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was signed into law by President Trump. On January 6, 2021, the Small Business Administration (SBA) and the Department of the Treasury issued two Interim Final Rules (IFR) to provide guidance on implementing the act.
The most notable provisions in the Economic Aid Act and the IFRs included:
- The extension of time to apply for first-time Paycheck Protection Program (PPP) loans until March 31, 2021;
- An expanded list of qualified expenses eligible to be paid with loans received from the PPP funds;
- Simplified forgiveness for first-time PPP loans less than $150,000;
- The ability to apply for a second round of PPP funds.
First Draw PPP Loans
The Economic Aid Act makes First Draw PPP loans available to borrowers that were in operation on February 15, 2020, and fall into one of the following categories:
- Businesses with fewer than 500 employees;
- Sole proprietors, independent contractors, and eligible self-employed individuals;
- Not-for-profits (including houses of worship);
- Those with North American Industry Classification System (NAICS) numbers beginning with 72, with fewer than 500 employees per location;
- Section 501(c)(6) business leagues;
- News organizations that are majority-owned or controlled by a business with a NAICS code of 511110 or 5151. Similarly, not-for-profit public broadcasting entities with a trade or business under the same NAICS codes.
Under the original PPP, publicly traded companies (PTC) qualified if they satisfied the statutory requirements; however, PTCs are ineligible under the renewed PPP.
Expanded Eligible Expenses
As with the First Draw PPP loans, borrowers can receive forgiveness for amounts received, provided the funds are used on qualified expenses. Under the first round of PPP, qualifying expenses included payroll, rent, covered mortgage interest, and utilities. Second Draw PPP funds include those same expenses, but the following have been added:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating expenditures, which refer to payments 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.
Important Note — if the First Draw PPP loan was not forgiven before 12/27/2020, previously distributed First Draw PPP loan proceeds can be used to offset these additional costs.
Simplified Forgiveness
Borrowers receiving PPP loans of $150,000 or less qualify for simplified forgiveness provided a certification is signed and submitted to the lender that includes the following:
- A description of the number of employees the eligible recipient was able to retain because of the PPP;
- The estimated amount of the covered loan spent by the eligible recipient on payroll costs; and
- The total loan value.
The eligible recipient of these loans is not required to submit any documentation in addition to the certification and information required to substantiate forgiveness. Recipients are, however, required to accumulate and retain documentation to substantiate forgiveness as the organization may always be subject to audit. The SBA released the updated and simplified forgiveness form, Form 3508S, on January 20.
Second Draw PPP Opportunity
Entities that previously received a PPP loan are eligible for a Second Draw PPP loan of up to $2 million, provided the entity satisfies each of the following conditions:
- Received a first-draw PPP loan;
- Has used, or will use, the entirety of its First Draw PPP loan on qualifying expenses and used, or will use, those funds on or before the expected Second Draw PPP loan to be disbursed to the borrower;
- Employs fewer than 300 employees, unless it
- satisfies the alternative criteria for businesses with a NAICS code beginning with 72, or
- qualifies as an eligible news organization with more than one physical location;
- Experienced a reduction in revenue of 25% or more in all or part of 2020 compared with all or part of 2019 by following the following criteria:
- The applicant must demonstrate that gross receipts in any calendar quarter of 2020 were at least 25% lower than the same quarter of 2019. Alternatively, applicants may compare annual gross receipts in 2020 with annual gross receipts in 2019 if they were in business during every quarter of 2019. If the borrower elects to compare annual gross receipts from 2020 to 2019, as-filed tax returns for each year will be required to support the reduction.
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- For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, borrowers must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than during either the third or fourth quarters of 2019.
- For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, borrowers must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
- For entities not in business during 2019 but in operation on February 15, 2020, borrowers must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.
It should be noted that the Economic Aid Act did not provide a general definition of gross receipts. However, the IFRs released by the SBA and Treasury are consistent with the established definition of receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
Consistent with the PPP Flexibility Act of 2020 (PPPFA), signed into law June 5, 2020, borrowers must spend no less than 60% of loan proceeds from the Second Draw PPP loan on qualified payroll costs over the selected eight- or twenty-four-week covered period.
Important Note for Provider Relief Fund (PRF) Recipients – The Department of Treasury and the SBA recently provided guidance that clarified that First Draw PPP funds should be excluded from 2020 revenue when calculating the revenue reduction requirements above. A question that remains unanswered is whether PRFs received from the Department of Health and Human Services (HHS) should also be excluded from the revenue calculation. Treasury has provided guidance that PRFs do not constitute disaster relief payments and are therefore includible in gross income. Further, those PRFs are taxable. In contrast, PPP funds that are subsequently forgiven are not includible in gross income and are not taxable. When examining all the guidance published to this date, it is reasonable to conclude that PRFs should be included in the revenue reduction calculation. This result may lead many taxpayers that received PRFs to have difficulty qualifying for the second-draw PPP funds.
Those wishing to apply for a First Draw PPP loan can access the SBA’s updated application form here. Those interested in applying for a Second Draw PPP loan may access the SBA’s Second Draw Borrower Application Form here.
We will continue to analyze this latest legislation and the related IFRs, as well as any guidance that follows.
If you have questions about the PPP loan modification or other tax aspects of the CRRSAA or would like guidance on other COVID-19 matters, visit PYA’s COVID-19 hub, or contact a PYA executive below at (800) 270-9629.
