By Steve Cleland, CPA
On December 21st, 2020, Congress passed the Consolidated Appropriations Act of 2021 (CAA) which included an update to Paycheck Protection Program (PPP) loans, details on the new PPP second round (PPP2) and several enhancements to the Employee Retention Credit (ERC).
This week, the U.S Small Business Administration (SBA) released the Interim Final Rule on Second Draw Loans, providing clarity for borrowers considering the Second Draw of Paycheck Protection Program (PPP) loans. The IFR can be found here.
Here is a summary of what we know so far:
PPP Round 2 - Second Draw Loans
PPP2 contains several important differences from the first round of PPP. PPP2 loans will be available to first-time qualified borrowers as well as businesses that previously received PPP funding.
Second-Time Borrower Eligibility
Previous PPP recipients will be eligible for another loan of up to $2 million provided they:*
*NOTE: The eligibility requirements stated above do not apply to first-time borrowers.
Gross receipts include all revenue received or accrued (in accordance with the business’ accounting method regardless of form or source). This includes revenue from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
Documenting Gross Receipts
For loans with a principal amount greater than $150,000
Sufficient documentation establishing that the applicant experienced a reduction in revenue must be provided at the time of application, which may include relevant tax forms. If relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements will suffice.
For loans with a principal amount of $150,000 or less
The applicant must submit sufficient documentation establishing that the applicant experienced a reduction in revenue at the time of application or on or before the date the borrower submits an application for loan forgiveness. If the borrower does not apply for loan forgiveness, the applicant must provide documentation at the SBA’s request. The documentation required is the same as that for loans greater than $150,000 as described above.
Maximum Loan
PPP2 borrowers may calculate their maximum loan amount by multiplying the borrower’s average monthly payroll in (i) the trailing 12-month period as of the date the loan is made, or (ii) calendar year 2019, by 2.5x. The maximum loan amount for second-time borrowers is $2 million while the cap for first-time borrowers remains at $10 million. Like the first round of PPP loans, seasonal employers will calculate their maximum loan amounts differently.
Maximum Loan for Hospitality Industry Borrowers
Second-time borrowers with NAICS Code 72 (restaurants and hotels) will be permitted to use a 3.5x multiplier of their average monthly payroll costs to calculate their maximum loan amount, capped at $2 million.
Flexibility Added to "Covered Period"
While the CARES Act originally provided for an 8-week covered period (time in which borrower must use loan proceeds to qualify for forgiveness) beginning on the day loan proceeds were disbursed, subsequent amendments allowed borrowers to alternatively elect a 24-week covered period. PPP2 borrowers will now be permitted to choose the length of their covered period provided it is no less than 8 weeks and no more than 24 weeks.
What You Should Do Now
It is important to note that the information above is an overview of what we currently know about the PPP2. We will not know the full details of the PPP2 process until the official application form, related regulations and FAQs are released. We advise you to be ready, discuss timing with your PPP lender, and be patient while additional information is forthcoming.
Tax Implications
Unless you have been hiding under a rock for the last few weeks, you likely already know the great news: PPP forgiveness is non-taxable and PPP expenses are now deductible for Federal taxes!
How California will treat PPP expenses remains a question. The FTB has been following the treatment previously prescribed by the IRS (no deduction), but we are hoping for updated guidance from California following the newest federal law.
New Expenses Added
Prior regulations allowed borrowers to include payroll, mortgage interest, rent, and utilities in their PPP forgiveness applications. Under the new legislation, additional non-payroll costs are permitted as follows:
Note that PPP forgiveness is still subject to the 60/40 split between payroll and non-payroll costs.
Simplified Forgiveness for Loans Under $150,000
The SBA will create a one-page loan forgiveness application form (within 24 days from 12/27/2020) that is even simpler than Form 3508S. The form will require the following:
Again, it is critical to contact your PPP lender to see what options are available to you for forgiveness. Banks handle this process differently so your forgiveness process will be determined by the institution from which you received the loan.
The most prominent change to the ERC is that businesses that received a PPP loan are now eligible for the ERC. This change could add a substantial benefit for your business for 2020 and 2021.
The ERC is designed to encourage businesses to retain their full-time employees through the pandemic and is a fully refundable tax credit for companies experiencing severe business disruptions due to COVID-19.
Under the new legislation, the ERC is now available for wages paid in 2021 through July 1st. Employers can receive up to $7,000 in credits per full-time employee (FTE) per quarter (as opposed to $5,000 per employee for all of 2020).
Companies need to claim the ERC on their quarterly Form 941, Employer’s Quarterly Federal Tax Return, so business owners will need to work with their payroll provider to claim the credits.
Who is Eligible?
To meet the definition of Eligible Employer, your company must have experienced one of the following:
A company may not have been directly ordered to close, but the company could be deemed as “partially suspended” when they may not be operating at normal capacity due to imposed restrictions from a government authority that limits commerce, travel, or group meetings.
A company may be an Eligible Employer due to indirect causes as well. A government order imposed on your company’s supply chain could have resulted in your company not operating at normal capacity if the business is unable to acquire needed supplies required to service its customers.
Qualifying Wages
Under the new legislation, effective for Q1 and Q2 of 2021, the determination of Qualified Wages is different depending upon whether your company has 500 employees or more.
Qualified Wages are compensation provided to an employee after March 12, 2020 and before July 1, 2021 (extended from January 1, 2021), and may also include the Eligible Employer’s qualified health plan expenses that are allocable to the wages.
No Double Benefits on Wages
A company may not double-benefit on the same wages for purposes of the ERC, the PPP forgiveness determination, and other wage-based tax credits.
All wages used for PPP forgiveness are not eligible. In addition, employers may not use the same wages for a Work Opportunity Tax Credit (WOTC) and paid sick and family leave credits under the Families First Coronavirus Response Act (FFCRA) calculations.
How to Claim the ERC
The ERC is claimed by reducing required payroll tax deposits on the quarterly Form 941.
The ERC is first applied against the 6.2% employer’s share of social security taxes due on all wages paid to all employees for the quarter. If your ERC is more than that amount, the ERC may offset against the rest of the payroll tax liabilities on Form 941 for the quarter.
If the ERC exceeds all payroll tax liabilities, the company may receive a refund.
If a company determines that it was an Eligible Employer for a previous quarter and has already filed its Form 941 for that quarter without claiming an ERC, the company may file an amended Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return to claim the credit.