Second Stimulus Bill of 2020 Revives Paycheck Protection Program Loans by Joseph C. Leuchter, CPA
The $900 billion stimulus bill signed into law on Dec. 27, 2020, expands upon various provisions of the CARES Act to provide ongoing economic relief to individuals and businesses that continue to struggle amid the COVID-19 pandemic. The new law revives the Paycheck Protection Program (PPP), bringing an additional $284 billion in potentially forgivable loans to small businesses, sole proprietors, independent contractors and nonprofits.
While loans under the renewed PPP, also referred to as PPP2, are available to both new and existing borrowers seeking to retain workers and sustain operations through this unprecedented crisis period, PPP2 differs in many ways from the original, first round of funding last year.
To qualify for 100 percent loan forgiveness, borrows must again allocate no less than 60 percent of loan proceeds to payroll costs, including, but not limited to, salary, wages, commissions, tips and employer payments of health insurance premiums and retirement plan benefits. However, PPP2 expands the allowable use of the remaining 40 percent of loan proceeds from rent, mortgage interest, and utilities to now include expenses for COVID-19-related safety measures and covered worker protections, such as PPE; sneeze guards and social distancing signage; costs of covered property damages and supplier costs; as well as cloud computing.
Following is a brief overview of the additional differences between PPP1 and PPP2. Just like the initial round of funding, the rules for PPP2 are quite complex and may change substantially over the next few months as the Small Business Administration (SBA) and IRS issue guidance to help applicants and taxpayers apply the intent of the law.
Maximum Loan Amount
The maximum PPP2 loan amount in 2021 is $2 million, down from a cap of $10 million in the first round of funding. Borrowers have the option to calculate their maximum loan amount as the lesser of $2 million or 250 percent of their average monthly payroll during either:
- the one-year period prior to loan origination, or
- calendar year 2019.
However, PP2 carves out an exception for borrowers in the hard-hit hospitality industry, including restaurants and hotels, which may borrow up to 3.5 times their average monthly payroll costs up to the $2 million maximum loan amount.
First-time borrowers applying for PPP2 loans must satisfy the program’s certification requirements that the current environment makes funding an economic necessity to retain employees and sustain operations.
Borrowers that received PPP loans in 2020 may be eligible for a second round of funding, also referred to as a second draw, when they satisfy the following additional criteria:
- They have 300 employees or less (down from a 500-employee limit in the first round of funding),
- They have used or have allocated use of the full amount of their first PPP loans, and
- Gross receipts for any quarter in 2020 declined 25 percent or greater from the same quarter in 2019 (or any comparable quarter for businesses that were not operational during all quarters of 2019).
The Covered Period
Borrowers granted loans in the first round of PPP funding were subjected to a series of rule changes, including the period of time they had to spend the loan proceeds and qualify for forgiveness. For PPP2, loan applicants have the flexibility to choose the length of their covered period from anywhere between eight weeks and 24 weeks. This provides loan recipients with more time to rehire furloughed workers and avoid workforce reductions that will impact eligibility for loan forgiveness.
Deductibility of Loan Expenses
The new stimulus package changes the treatment of forgiven PPP loan amounts, allowing borrowers a deduction for “otherwise deductible” expenses paid for with forgiven PPP loan proceeds. Moreover, it applies this change retroactively to PPP loans granted in 2020. This is welcome news for existing and new loan recipients who may now exclude forgiven loan amounts from taxable income and deduct covered costs.
It appears Congress learned several lessons from PPP1 when drawing up the loan forgiveness rules for PPP2. For example, borrowers with PPP2 loans of less than $150,000 will be required to simply complete a one-page, self-certification application for loan forgiveness. For all borrowers, the maximum amount forgivable is no longer reduced by advances of Economic Injury Disaster Loans they may have received.
As the SBA and IRS begin to issue PPP2 guidance in the new year, businesses and nonprofits can prepare for funding by meeting with their business advisors and CPAs to determine whether a forgivable loan is a viable option for maintaining employees and operations through 2021.
About the Author: Joseph C. Leuchter, CPA, is a senior manager in the Tax Services practice of Berkowitz Pollack Brant Advisors + CPAs, where he helps individuals and businesses grow their wealth and profits while maintaining tax efficiency and compliance. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or at email@example.com.