On Sunday night President Donald Trump finally signed into law the $900 billion coronavirus relief package passed by Congress, despite initial threat to veto the bill due to the small amount of direct relief to individuals. This package is part of a $1.4 trillion resolution to fund the government through September 2021.
- Funding for PPP loans for small businesses
The act appropriates another $284 billion funding for the Paycheck Protection Program, and allows both first-time and second-time borrowers to apply. This is good news for everyone, although the second round of PPP loans contains stricter and targeted eligibility criteria compared to the previous one. A borrower will have to have less than 300 employees, and will have to establish that they experienced at least a 25% drop in gross receipts during any quarter in 2020 compared to the same quarter in 2019. The new act also caps PPP loans at $2 million and sets aside $12 billion specifically for minority-owned business.
- Non-payroll eligible expenses
For the purposes of loan forgiveness, borrowers need to utilize at least 60 percent of the loan for payroll-related and 40 percent for other eligible expenses. The part two of the PPP included more non-payroll eligible expenses for forgivable uses.
Four additional categories are added, namely, “covered operational expenditures”, “covered property damage” (repairs made necessary by rioting or looting, not covered by insurance), “covered supplier costs”, and “covered worker protections” (expenses for personal protective equipment and adaptive investments related to COVID-19 health and safety guidelines and requirements). These expenditures are in addition to utilities and payroll costs laid out in the original rules last April.
- Control on loan cover period
To maximize loan forgiveness, borrowers can now choose the duration of their loan end date, as long as the date falls between eight weeks and 24 weeks after receipt of the loan. This change gives small business owners more control and helps minimize loan forgiveness reductions based on decreases in the borrower’s employee pay rates and full-time equivalent headcount, measured during the covered period.
- Simplified application process
Loans that do not exceed more than $150,000 would be subject to a much more simplified forgiveness application. A borrower needs to send to the lender a certification that is not more than 1-page in length. This document lists the loan amount, the number of employees retained, and the amount of the loan spent on payroll for loans. The SBA must produce this document within 24 days of the COVID-19 relief bill’s enactment, and may not require additional materials unless necessary.
- Tax Deductibility for PPP expenses
The new law clarified a critical concern regarding the deductibility of PPP loans. Under this, PPP loans are considered tax-free. This has been perceived as a significant issue for borrowers in the CARES Act, as the IRS ruled against the deductibility of PPP loans for federal income tax purposes. The passage of the law negates this decision in favor of borrowers.
- Deductibility of EIDL grants
The Act also allocated $20 billion of funding for EIDL grants. This allows businesses suffering from significant economic injuries, particularly in low-income communities to apply for an advance that does not need to be repaid for up to $10,000. Previously it was stated that any EIDL advance grant received would reduce PPP Loan Forgiveness. The current law essentially repeals this provision so any cash received from EIDL will not have implications on PPP loan forgiveness.
Qualified businesses may submit a request to SBA and receive the full $10,000 EIDL grant regardless of whether their EIDL application “is or was approved,” they accepted an EIDL loan, or they previously received a PPP loan. It should be noted that any EIDL grant received will be subtracted from the $10,000 capped total.
- Bigger loan rates for NAICS code 72 businesses
Most business borrowers can receive loan funds based on 2.5 times the average total monthly payroll cost in 2019, capped at $2 million. But for businesses that start with NAICS code 72, that number has been increased to 3.5. This generally includes restaurants and hotels who have suffered the most during the pandemic.
8. Expansion of Employee Retention Tax Credit
The relief act also expanded the employee retention tax credit and several expiring tax provisions. The Employee Retention Credit now permits a credit of up to 70% for wages of up to $10,000 per quarter. Employers who utilize the credit along the PPP loan will have the ability to elect that expenses receive treatment under rules to be issued.
We expect that additional clarifications and guidance will be published by the SBA, Treasury, and the IRS in the following weeks.
Levine & Associates will continue to provide you with the latest updates on the legislation and other accounting matters. If you are interested in learning more about your options with this program, you can book a commitment-free consultation with us at https://calendly.com/levine-and-associates.