Late on the evening of December 21, 2020, in a rare showing of bipartisanship, the House of Representatives and Senate overwhelmingly (the House voted 359 to 53, and the Senate voted 92-6) passed legislation to provide additional relief to Americans and their businesses hard hit by the COVID-19 pandemic. On Sunday evening, December 27, 2020, the President signed the legislation into law. The new law, titled the ‘‘Consolidated Appropriations Act, 2021’’ is mammoth – covering over 5,590 pages – in part because it also is intended to fund the federal government through the end of the fiscal year on September 30, 2021.
As the media widely reported, the legislation includes:
- $325 billion in aid for small businesses struggling after nine months of COVID-19-induced economic hardships. The bill provides more than $284 billion to the U.S. Small Business Administration (the “SBA”) for first and “second draw” forgivable Paycheck Protection Program (“PPP”) loans and allocates $20 billion to provide Economic Injury Disaster Loan (“EIDL”) grants to businesses in low-income communities.
- Additional stimulus payments of up to $600 for persons making $75,000 or less ($1,200 for a couple filing jointly with income of $150,000 or less) and $600 for each of their children aged 17 or younger.
- Payments of $300 per week in additional federal unemployment benefits through March 14, 2021 (this reinstates part of the $600 per week that was provided under the CARES Act, which expired in July).
- An extension of the eviction moratorium established by the Centers for Disease Control and Prevention (“CDC”) until January 31, 2021.
- Additional funding for state and local governments to use to assist people in paying past due and current rent.
- Extension of the employer tax credit under the Families First Coronavirus Response Act (the “FFCRA”) for employers who voluntarily choose to continue the paid sick leave and expanded FMLA leave through March 31, 2021 (the actual employer mandate of FFCRA leave expires on December 31, 2020).
- Additional funding for vaccine development and distribution, COVID-19 testing and contact tracing, personal protective equipment for healthcare workers, addiction and mental health, and other purposes designed to help Americans recover and stimulate the economy.
For our small business clients, we believe that the two most material parts of the legislation relate to: (1) taxation, which is included in the provisions titled the “COVID-related Tax Relief Act of 2020” (the “Tax Act”), and (2) current and additional loans under the PPP, which is included in the provisions titled the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (the “Economic Relief Act”). This Alert will highlight only a few of the more salient portions of these two parts of the overall legislation.
The Tax Act – Deductibility of Expenses Paid With PPP Loan Proceeds
When Congress passed the ‘‘Coronavirus Aid, Relief, and Economic Security Act’’ (the ‘‘CARES Act”) in late March 2020, it included language exempting from federal income tax the portion of a PPP loan that is forgiven by the SBA. In doing so, it was Congress’ intention to make the PPP loan and its forgiveness tax neutral. The Treasury Department and the Internal Revenue Service, however, subsequently announced that, although the PPP loan proceeds that are forgiven are not subject to tax, the covered expenses that are paid in 2020 using the proceeds of the PPP loan cannot be deducted on the borrower’s 2020 federal income tax return (even though the borrower may not know if the PPP loan or any portion is forgiven when its tax return is due). The Tax Act clarifies Congress’ original intention in the CARES Act, by providing:
1. the full amount of PPP loan proceeds are exempt from taxation;
2. no deduction is to be denied for any covered expenses (i.e., payroll costs and covered non-payroll costs) that are paid with the proceeds of the PPP loan; and
3. in the case of a PPP borrower that is a partnership or S corporation, any portion of the PPP loan that is forgiven will be treated as “exempt income” for purposes of Sections 705 and 1366 of the Internal Revenue Code (thus allowing for a step-up in basis of the partnership interest or S corporation stock for the amount of the forgiven PPP loan proceeds that are deemed to be exempt income).
• OBSERVATION: These provisions are applicable for taxable years ending after the date of enactment of the CARES Act (March 27, 2020), and thus applies to virtually all PPP loans obtained since the CARES Act became law.
• OBSERVATION: The Tax Act also applies the same rules to any “second draw” PPP loan (see below), and the rules remain applicable for “any tax year ending after the date of the enactment” of the Tax Act (i.e., the date on which the legislation becomes law by the President’s signature or the override of his veto by Congress, as applicable).
The Tax Act includes a number of other tax provisions that will impact small businesses, including the return of deductions for business meals. Contact your Trenam lawyer if you have any other tax questions.
The Economic Relief Act – What is New With PPP Loans
Provisions are included that apply to existing PPP loans, including borrowers who may be getting ready to apply for forgiveness. Other provisions allow certain “small businesses” to apply for a “second draw” PPP loan, even if the business already had a PPP loan and has (or has not yet) received forgiveness (see below). The following discussion applies to all PPP loans, whether now outstanding or subsequently obtained.
Clarification of the “Covered Period”: When PPP borrowers were given the option of using an eight week or a twenty-four week “covered period” for calculating the use of PPP loan proceeds for covered purposes and the forgiveness calculation, many borrowers were confused whether they were required to use only eight weeks or twenty-four weeks, even if they had completely exhausted the PPP loan proceeds at some point between those two time periods. The Economic Relief Act clarifies that a borrower can select any number of weeks as its “covered period,” as long as the time period is at least eight weeks and no more than twenty-four weeks after the PPP loan was funded. This allows a borrower to coordinate its forgiveness calculations with its use of proceeds, payroll periods, and employee retention dates.
Simplified Forgiveness Application for PPP Loans of $150,000 or Less: Many smaller borrowers have been hoping for relief in the forgiveness process. The SBA had given relief to borrowers whose PPP loans were $50,000 or less, but rumors of another group that could use a simplified process have circulated for several months. The Economic Relief Act finally fulfills that hope. It allows a borrower whose PPP loan is $150,000 or less to obtain forgiveness by filing a one-page application that includes only (a) a description of the number of employees that the borrower was able to retain because of the PPP loan, (b) the estimated amount of the PPP loan that was spent on covered payroll costs, and (c) the total loan amount. The borrower also will be required to attest that its information is accurate and it has complied with the PPP loan requirements. These attestations will be in lieu of the borrower submitting supporting documentation with its application (although that information must be retained by the borrower). The SBA is required to issue the simplified application form within twenty-four days after the enactment of the legislation into law.
• OBSERVATION: Although this simplification is good news for many smaller PPP borrowers, it is not a new safe harbor. Despite the requirement that forgiveness be granted if the eligible borrower submits the simplified application, the SBA still will have the right to audit the borrower to ensure that its attestations are accurate.
Additional Eligible Payroll Costs: The CARES Act included group health insurance as an eligible payroll cost that an employer-PPP borrower could use the PPP loan proceeds to cover during the covered period. The Economic Relief Act adds to the definition of insurance benefits “group life, disability, vision, or dental insurance benefits.” These expenses still would include only the employer-paid portion of the premiums and still must be paid during the covered period to be eligible.
Additional Eligible Non-Payroll Costs: The CARES Act, as clarified by subsequent SBA Interim Final Rules, allowed as eligible expenses for which PPP loan proceeds could be used payroll costs and eligible non-payroll costs, including mortgage interest payments on loans incurred prior to February 15, 2020, rent obligation on business leases in place on February 15, 2020, and utility expenses. The Economic Relief Act adds four additional categories of eligible non-payroll costs for which PPP loan proceeds may be used, including:
1. Covered operations expenditures are payments for software or cloud computing services that facilitate business processes, such as payroll, billing, accounts receivable and payable processing, HR, inventory, accounting, and the like.
2. Covered property damage costs are payments for repairs of property damage caused by vandalism or looting during a public disturbance that occurred during 2020 and were not covered by insurance.
3. Covered supplier costs are expenditures made by a PPP borrower for goods that are essential to the operations of the borrower’s business, and are made pursuant to a contract, order, or purchase order that either was in effect prior to the date the PPP loan was received or, if for perishable goods, was in effect before or at any time during the covered period of the PPP loan.
4. Covered worker protection expenditures include the cost of personal protective equipment and capital expenditures for business (not residential) property that a PPP borrower was required to purchase or incur to comply with requirements of the U.S. Department of Health & Human Services, the CDC, OSHA, or state or local government requirements issued after March 1, 2020 and as long as the stated national emergency remains in effect, including, health screening costs, costs of installation, maintenance or renovation of a drive-thru window, air pressure ventilation or air filtration systems costs, and costs to install, maintain or renovate physical barriers (e.g., sneeze guards).
• OBSERVATION: Although these additional eligible non-payroll costs can help a PPP borrower that is struggling to ensure that it has used all of its PPP loan proceeds for eligible expenses, the borrower still must remember that at least 60% of the PPP loan proceeds must be used for eligible payroll costs during the covered period, which may be as short as 8 weeks or as long as 24 weeks or any number between 8 and 24 weeks (the same parameters applicable to the initial round of PPP when the PPP stopped accepting applications in August, 2020) to be able to achieve full loan forgiveness. Thus, while these additional categories can help, they still cannot exceed 40% of the total used loan proceeds in the aggregate.
• OBSERVATION: The additional eligible payroll costs and eligible non-payroll costs are added to the law as if originally included in the CARES Act, so any PPP borrower may use them, with one exception. That is, a borrower who receives forgiveness prior to the date the law is enacted is not eligible to request additional forgiveness. We have not seen any statistics on this, but we expect that the number of borrowers who already have received forgiveness is relatively small. The language of these provisions, however, does seem to indicate that a borrower whose forgiveness application is pending on the date of enactment could amend the forgiveness application to take advantage of the additional eligible costs, if necessary. Additional guidance will be needed from the SBA on how this amendment would work.
Repeal of the EIDL Advance Reduction to the Forgiveness Amount: Under the CARES Act, if a borrower received an advance under the EIDL program, that advance was a reduction in the amount of the borrower’s loan forgiveness. The Economic Relief Act repeals this requirement, so the borrower who received an EIDL advance will not be required to reduce the loan forgiveness amount requested.
• OBSERVATION: This repeal is effective as if originally included in the CARES Act, and, unlike the provisions adding the additional eligible costs, there is no exception for a PPP borrower who already has obtained forgiveness at the time the law is enacted. Instead, the SBA is instructed to issue rules stating how all PPP borrowers may recover any sums not previously forgiven because of an existing EIDL advance. These rules are to be issued no later than 15 days after the law is enacted. As with so much relating to the PPP, the devil will be in the details of the SBA’s rule.
The Economic Relief Act – Second Draw PPP Loans
The Economic Relief Act provides additional funding for a second round of PPP loans for certain hard-hit businesses, including for-profit entities, not-for-profit entities (now including IRC §501(c)(6) industry groups, chambers of commerce and the like, which is an expansion), sole proprietors, independent contractors, Tribal businesses and agricultural cooperatives. These “second draw” PPP loans will be available for businesses that did not seek a PPP loan during the first round of lending and for certain eligible businesses that obtained a PPP loan during the first round but that meet the eligibility criteria. For the most part, the same rules apply to the “second draw” loans, except for the following.
Who is eligible for a “second draw” loan? Any business that:
1. employs 300 or fewer employees, counted using the SBA’s affiliation rules, with the same exception and per-location employee count that applied for the first round of PPP loans (see our prior Alerts);
2. can document a decline of 25% or more in its “gross receipts” during the first, second, or third quarter of 2020, or if filing on or after January 1, 2021, the fourth quarter of 2020, as compared to the same quarter in 2019 (with special rules if the borrower was not in business for all or any of 2019 but started business on or prior to February 15, 2020, or if the employer employs seasonal employees); and
3. if the business obtained a previous PPP loan, the full amount of that previous PPP loan has been used and an application for forgiveness is filed before applying for the “second draw” loan.
• OBSERVATION: The term “gross receipts” is not defined for most businesses; except for a not-for-profit entity or a veterans’ organization, “gross receipts” is determined pursuant to IRC §6033. Given that the business must document its decline of 25% or more, it would appear that this cross reference would mean that computing “gross receipts” will be based upon the applicant’s regular accounting methods.
What is the maximum amount of PPP loan available for the “second draw”? The amount for which a business qualifies is determined in the same manner as for the initial round of PPP loans. That is, 2.5 times average monthly employer payroll (but 3.5 times for businesses in NAIC Industry Code classification 72, which mainly includes restaurants and hotels), with a maximum loan of $2,000,000. The borrower can elect to calculate the relevant payroll using either calendar year 2019 or the twelve-month period prior to the date of application for the “second draw” loan.
A special rule is included for self-employed farmers and ranchers that allows the “payroll” to be calculated using the gross income as shown on the 2019 Schedule F to IRS Form 1040. Under the CARES Act, the farmer or rancher had to use net profits (although this change is of limited use, because the farmer or rancher still is limited to a maximum of $20,833 in any event).
What other rules apply to the “second draw” loan program? All of the additions specified above in this Alert, including the deductibility of expenses paid with the PPP loan proceeds, the expansion of eligible payroll and non-payroll costs, and the use of a simplified loan forgiveness process for PPP loans of $150,000 or less, also apply to the “second draw” loans. Likewise, the loan forgiveness process will work the same.
There are a number of other changes that Congress included to help small businesses that are struggling as a result of the COVID-19 pandemic, including setting aside portions of the funds available for “second draw” PPP loans for first and second time PPP borrowers with ten or fewer employees, and first time borrowers which have been made newly eligible because of the changes made by the Economic Relief Act.
In addition, $15 Billion in funding is set aside to be given as non-taxable grants (i.e., no payback requirement) for independent promoters of live events and live event venues, theatrical producers, independent theaters, talent representatives (i.e., agents and managers), and museums that were shuttered because of the COVID-19 pandemic. To be eligible for the grant, the business must show a decline in “gross earned revenue” of at least 25% during the first, second, or third quarter of 2020 (or the fourth quarter if the grant application is filed after January 1, 2021) as compared to the same quarter in 2019, and the business either must be reopened or intends to reopen to promote, organize, or stage live events or public productions and to employ one or more people to carry out certain specified functions. The event or events must be ticketed and a charge made for the tickets, and the employees must be fairly paid. Promoters or theaters that are owned by public companies or which received more than 10% of gross revenue from federal funding, or that operate venues in more than one country or more than ten states, or that employed more than 500 full-time equivalent employees as of February 29, 2020, or which have received a PPP loan, are not eligible for the grants. An applicant for this grant must make “a good faith certification that the uncertainty of current economic conditions makes necessary the grant to support the ongoing operations of the eligible person or entity.” The grants will be awarded pursuant to a priority process that is spelled out in the Economic Relief Act.
* * * * *
In signing the legislation, the President secured a commitment from Congress to consider a number of changes to the new law. What those changes are is unknown at the time of this writing (December 28, 2020). You may visit the Covid-19 Legal Updates section on our website for additional updates.
If you have any questions regarding how this legislation, or any prior rule or notice from the SBA impacts your existing PPP loan, your desire to obtain more PPP funding, or your business plans, please feel free to contact any member of Trenam Law’s COVID-19 Team or your primary Trenam attorney.