Consolidated Appropriations Act, 2021: PPP Loan Related Expenses Tax Deductible and Round Two
Late on Sunday, December 27, 2020 President Trump signed into law a piece of legislation called the Consolidated Appropriations Act, 2021. This 5,500-page bill carried a budget of $900 billion including $300 billion of additional relief to small businesses, another round of direct cash stimulus payments, expanded unemployment insurance benefits, and a variety of funding dedicated to COVID-19 testing and tracing. A signature piece of the CARES Act was the PPP Loan Program. The Consolidated Appropriations Act, 2021 has several provisions that address both the original loan program and rolls out a second round of PPP Loans to certain qualifying small businesses and other organizations.
Taxability of PPP Loan Forgiveness and Deductibility of Related Expenses:
The CARES Act provided that any PPP Loan forgiveness was non-taxable to the recipient. The Internal Revenue Service, however, later issued Notice 2020-32 that indicated that any expenses related to the forgiven PPP Loan were non-deductible, thereby essentially making the PPP Loan forgiveness a taxable event. This new law clarifies both the original position of the CARES Act as to non-taxability of the forgiven loan and makes it clear that all qualifying expenses related to the forgiveness of the original PPP Loan are fully deductible by the business.
Round Two of the PPP Loan Program:
The new Act also creates a $284.5 Billion fund to re-open the PPP loan program for first and second-time borrowers. This program runs through March 31, 2021 and adds some additional restrictions on eligibility.
Business Eligible for New Loans:
Small businesses with less than 300 employees
Business has been in operation on or before February 15, 2020
Business has used, or will use, all the original PPP loan proceeds
Sole-proprietors, independent contractors, self-employed individuals
NEW: Borrowers that returned all or part of a previous PPP loan can reapply for the maximum loan amount
NEW: Borrowers that did not receive the maximum eligible loan can reapply for the additional loan proceeds
NEW: Qualifying 501c6 non-profit organizations, destination marketing organizations, housing cooperatives, local newspapers, and TV & Radio broadcasters
NEW: Businesses must have experienced a 25% or more reduction in Gross Receipts in any one quarter of 2020, as compared to the corresponding quarter in 2019. If not in business during the first three quarters of 2019, the business can compare the first three quarters of 2020 to the fourth quarter of 2019
Maximum Loan Amount:
Most businesses can borrow up to 2.5 times the business average monthly payroll costs incurred in the 12 months preceding the loan or the calendar year
NEW: Hospitality Businesses (Using the NAICS Code 72) can borrow up to 3.5 times the business average monthly payroll costs incurred in the 12 months preceding the loan or the calendar year
NEW: Max Loan amount under this program is capped at $2 Million
Payroll costs include:
Normal gross wages,
Vacation, parental, family, medical & sick leave
Group health care benefits
Retirement benefits
Total payroll costs cannot exceed $100,000 per employee annually
Allowable Uses of Loan Proceeds:
Employee Salaries, excluding compensation in excess of $100,000 per employee
Paid Sick or medical leave
NEW: Group health care benefit costs and insurance premiums, including medical, dental, vision, disability, and life insurance
Mortgage payments
Rent payments
Utility payments
Interest on debt in existence on February 15, 2020
NEW: Covered operations expenditures (Software, cloud computing and other human resources and accounting needs)
NEW: Covered property damage costs (Damage caused by vandalism or looting due to public disturbances in 2020 not covered by insurance)
NEW: Covered supplier costs (Essential operational costs paid to a supplier of goods pursuant to a contract or purchase order in effect prior to or during the covered period)
NEW: Covered worker protection expenses (Operating or capital expenditures necessary to adapt the business activities to comply with DHHS, CDC or OSHA rules to protect employees)
Loan Terms:
Sets a maximum interest rate of 4%
No prepayment fees will apply
Waives both borrower and lender fees
Waives collateral and personal guarantee requirements
Waives credit elsewhere test
Allows complete deferment of loan payments for 6 months but not more than 1 year
Loan Forgiveness Provisions:
Borrowers are eligible for loan forgiveness in the amount spent during either an 8- or 24-week covered period after the origination of the loan on the eligible costs listed above
The borrower must maintain a 60/40 payroll to non-payroll expenditure ratio to receive full forgiveness
This Act repeals the CARES Act provision that requires PPP borrowers to deduct their EIDL Advance from their PPP loan forgiveness amount
Eligible forgiven amounts will be reduced proportionally by the reduction in employees retained as compared to the prior year and reduced by the reduction in pay for any employee beyond 25% of their prior year compensation (i.e., You must maintain the same number of employees and pay them at least 75% of their prior year comp to be eligible for full debt forgiveness)
Any debt forgiven under the terms of this program will be excluded from taxable income and all related expenses will be deductible
Any loans not forgiven or repaid in full after one year will maintain a max term of 10 years at a rate of 4%
This act also creates a new simplified loan forgiveness application for loans under $150,000
This second round of loans will also be administrated by banks, rather than directly through the U.S. Small Business Administration. If you are interested in applying for one of these loans, please contact your local bank representative as soon as possible to discuss the application and funding process
As always, if you have any questions or require any assistance with completing the loan application process, please reach out to your FMD professional advisor at any time.
