Tax Services The New Round of PPP Loan Programs
 
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On December 27, 2020, President Trump signed the Consolidated Appropriations Act of 2021, and within the 5,593 pages is some additional PPP loan relief and a second round of PPP funds for specific employers. Below are key facts about the new round of Paycheck Protection Program loans.

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PPP Loan Taxability

Congress is overriding the IRS and allowing the full deductibility of the expenses in addition to the tax-exempt status of the forgiveness of debt. In order to leave the IRS without any uncertainty the Act states the following:

  1. No amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness;
  2. No deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income; and
  3. In the case of an eligible recipient that is a partnership or S corporation
  4. Any amount excluded from income by shall be treated as tax exempt income for purposes of section 705; and
    • Any increase in the adjusted basis shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.
    • This aims to take away any uncertainty out of the intent and taxability of PPP loan forgiveness and the corresponding deductions.

Although this provides clarity, it does not mean the loans and corresponding deductions are deductible in 2020. This is because the loans that are not forgiven prior to year-end are still only loans and will not create the necessary tax basis to take the deductions for S corporations and partnerships. If you do not have the necessary basis, then these losses may be suspended for a year. Timing of distributions are important, and waiting until 2021 may result in a more favorable tax situation.

The same treatment has been applied to the Economic Injury Disaster Loan (EIDL) grant, and the grant will no longer reduce the forgiveness amount.

Further Clarification on Covered Period

The Act gives more clarity by stating that the covered period shall begin on the date of the origination of the covered loan and end either 8 weeks after such origination or 24 weeks. The purpose of this is clarify that it is up to the recipient of the loan as to the length of time for the covered period, and it is not dictated by the SBA, IRS or your bank.

Simplified Forgiveness Applications

For loans less than $150,000, the government is simplifying the forgiveness application.

The recipients will be required to sign and submit a certification to the lender. The SBA has 24 days to create this certification, and by law, it must not be more than 1 page in length and shall only require the recipient to provide the following:

  1. A description of the number of employees the eligible recipient was able to retain because of the covered loan;
  2. The estimated amount of the covered loans spent by the eligible recipient on payroll costs; and
  3. The total loan value.

The certification will require the recipient to attest the following:

  • The information is accurately provided;
  • They complied with the requirements; and
  • They are retaining the relevant requirements for a minimum of 4 years.

Expansion of Benefits Definition

Benefits are being expanded from only Medical Insurance to include group life, disability, vision or dental insurance as benefits.

Expansion of Eligible Expenses

The new law expands the types of eligible expenses for both old and new PPP loans. As a reminder, during the original PPP loan program, the proceeds were limited to the following:

  • Salaries and Benefits;
  • Rent;
  • Interest; and
  • Utilities.

In addition to the above, the new law includes the following:

  • Operation Expenditures;
  • Property Damage Costs;
  • Supplier Costs; and
  • Worker Protection Expenditures.

Below is a further explanation of the four new eligible expenses:

Operation Expenditures covers a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking payroll expenses, human resources, sales and billing functions or accounting or tracking of supplies, inventory, records and expenses. Some examples of this type of expenditure include the purchase of Zoom, Amazon Cloud or accounting software, such as Sage Intacct.

Property Damage costs refer to any related cost of physical property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation. However, it does not appear to cover damage due to any of the many Hurricanes.

Supplier Costs include an expenditure paid to a supplier of goods that are essential to the operations of the entity at the time at which the expenditure was made and is made pursuant to a contract or purchase order in effect at any time before the covered period or specifically for perishable goods, in effect before or at any time during the covered period with respect to the covered period. Example: a manufacturing company would be allowed to use the funds for the supplier contracts to buy widgets for a supplier prior to the loan, but if he contracted to buy the goods after the loan was made, then the proceeds would be restricted. However, a restaurant would be allowed to contract to buy vegetables and other foods during the covered period.

Worker Protection Expenditures include any expenditure, whether operating or capital, to help facilitate the adaptation of the business activity into compliance with government requirements or government guidance. This may include PPE or renovation of assets that my institute better safety systems. Some examples highlighted in the legislation includes a drive-through window, and indoor, outdoor or combined air or air pressure ventilation or filtration system, or a physical barrier such as a sneeze guard.

Eligibility for the New Paycheck Protection Program

An eligible entity is similar to the first PPP eligibility: a partnership, sole proprietor or corporation are eligible, along with nonprofit organizations and independent contracts, as long as they were in business by February 15, 2020. These businesses may not employ more than 300 employees, which was reduced from 500 employees, and had gross receipts during the first, second, third or fourth quarter that shows a 25 percent reduction from gross receipts during the same quarter in 2019. Below are two examples:

Example 1: ABC, LLC would be eligible for the second round of PPP because their 2nd quarter was greater than 25% decrease.

 

2019

2020

Percentage Change

1st Quarter

$1,200,000

$1,400,000

  16.6%

2nd Quarter

$2,000,000

$1,499,499

- 25%

3rd Quarter

$3,000,000

$4,000,000

  25%

4th Quarter

$2,000,000

$8,000,000

400%

 

Example 2: DEF, LLC would not be eligible as their decrease in revenue was not greater than 25% in any quarter.

 

2019

2020

Percentage Change

1st Quarter

$1,200,000

$1,400,000

  16.6%

2nd Quarter

$2,000,000

$1,600,000

- 20%

3rd Quarter

$3,000,000

$2,700,000

- 10 %

4th Quarter

$2,000,000

$2,000,000

     0%

 

The whole year gross receipts do not matter, as the test is specific to quarters. Special rules apply for businesses that were not in business for the full 2019 year.

New PPP Amount Calculation

There appears to be a new calculation for the eligible amount. The maximum amount of the loan is the lesser of the following:

  • The average monthly payment for payroll costs incurred or paid by the eligible entity during either the 1-year period before the date on which the loan is made or calendar year 2019 multiplied by 2.5
    • The recipient gets to choose, so if your average salary in 2019 is greater than 2020, then the recipient will choose 2019. Example: If your business averaged $100,000 of payroll in 2019 per month and averaged $75,000 in 2020, then your loan amount would be $250,000.
  • $2,000,000

Similar to the first PPP loans, special rules exist for seasonal employers and new businesses. Restaurants and other entities that have NAICS codes starting with 72 are subject to the 300 employees per location.

Conclusion

The loan process for many businesses should be relatively simple, unless you had a decrease earlier in the year and have since out performed your 2019 year. If your payroll increased in 2020, then redoing the calculation may be advantageous. Finally, under the letter of the law, guidance is due in the next 10 days from the SBA.

Help Is Available

P&N’s dedicated professionals are committed to understanding and applying this information to help our clients. Please contact us or connect with your P&N advisor to discuss your organization’s questions, concerns, and priorities.

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