New Legislation Offers Additional Economic Relief for PPP Borrowers and Other Businesses and Nonprofits
The CARES Act, which was signed into law in March 2020, was the largest economic stimulus package in U.S. history. But as the COVID-19 pandemic dragged on, many wondered whether Congress would extend the Paycheck Protection Program (“PPP”) and other relief measures implemented by the CARES Act, or enact new measures, to address the economic effects of the crisis, which have been devastating in a number of sectors. After months of anticipation over whether a bipartisan consensus would emerge, weeks of worry over whether Congressional leadership would bring a bill to the floor for a vote, and days of anxiety over whether the bill would die on President Trump’s desk, the President signed into law the Consolidated Appropriations Act, 2021 (the “Act”) on December 27, 2020 – exactly nine months after he signed the CARES Act. The Act, which appropriates funds for the federal government through September 2021, also contains several important tax and financing provisions designed to provide relief to small and mid-size businesses (and larger businesses in certain sectors).
Changes to PPP
The Act reopens PPP until March 31, 2021, with various changes and clarifications affecting existing and new PPP borrowers.
Process and Eligibility
Businesses wishing to apply for potentially forgivable loans under the renewed PPP, or PPP 2.0 as many are calling it, should do so through banks and other institutional lenders qualified under the Small Business Act. Loans made under the program are guaranteed and regulated by the Small Business Administration (“SBA”). First-time applicants must meet the original PPP eligibility criteria, including having no more than 500 employees.
The CARES Act provided for an eight-week covered period during which borrowers could spend PPP loan proceeds on payroll costs and other permitted expenses (more on this below). This period was later extended to 24 weeks by the Paycheck Protection Flexibility Act. Now, new borrowers may select a covered period of between eight and 24 weeks.
Borrowers are permitted to use up to 40 percent of PPP funds for non-payroll costs, including rent or lease payment, utilities, and interest on mortgage indebtedness. The Act expands these categories to cover other non-payroll expenses, including:
- Worker protection expenditures for personal protective equipment (e.g., face masks);
- Adaptive measures to comply with federal or state health and safety guidelines (e.g., air filtration systems);
- Payments to vendors for essential supplies;
- Certain software, HR and cloud computing expenses;
- Property damage costs resulting from public disturbances that occurred during 2020 and that are not covered by insurance; and
- Supplier costs pursuant to a contract, PO, etc. that was in effect prior to taking out a PPP loan that are essential to the borrower’s operations.
New borrowers, as well as existing borrowers who have not yet had their loans forgiven, will be permitted to take advantage of this expansion to eligible forgivable expenses. However, borrowers still need to use at least 60 percent of the loan proceeds for permitted payroll expenses in order to potentially obtain complete loan forgiveness.
Ability to Request Loan Size Increase
Importantly, borrowers who have not yet received forgiveness for existing PPP loans and who returned amounts disbursed, or did not accept the full amount for which they were approved, may reapply for a PPP loan for an amount equal to the difference between the amount retained and the maximum amount available. Similarly, borrowers who are eligible for additional amounts based on revised guidance may increase the size of their loans.
Second Draw Loans
Second draw loans, aimed at assisting hard-hit businesses and nonprofits, are available to borrowers who have already received a PPP loan that meet the following criteria:
- Employ 300 or fewer employees;
- Have used the full amount of their first PPP loan; and
- Had gross receipts during the first, second, third or fourth quarter of 2020 that were at least 25% less than during the same quarter in 2019.
Eligibility for second draw loans is also extended to the following:
- Most 501(c)(6) nonprofit organizations (i.e., business leagues, chambers of commerce, real estate boards, boards of trade, and similar organizations) and tax-exempt nonprofit destination marketing organizations with 300 or fewer employees that receive less than 15 percent of their gross receipts from lobbying activities, which activities do not comprise more than 15 percent of the organization’s activities, and incur less than $1 million in annual expenses for lobbying activities.
- Housing cooperatives with 300 or fewer employees.
- Certain news organizations with 500 or fewer employees at any physical location or that are nonprofit public broadcasting entities.
The Act specifically excludes from the second draw program businesses engaged in political or lobbying activities, including think tanks, and businesses owned or controlled by entities in China or Hong Kong, or where a member of the borrower’s board of directors resides in China.
The maximum amount of second draw loans is now capped at $2 million and is calculated in the same manner as under the original PPP: 2.5 times the borrower’s average monthly payroll costs for 2019 or the most recent 12-month period. For borrowers with NAICS codes beginning with 72 (e.g., restaurants and food service companies), the multiple is 3.5 rather than 2.5, and the maximum loan amount is limited to $2 million for each physical location with no more than 300 employees.
Simplified Forgiveness Application
The Act provides for a simplified forgiveness application for borrowers who receive a covered loan of not more than $150,000. The application will consist of a one-page form and will include a description of the number of employees the borrower was able to retain because of its PPP loan, the estimated amount of the loan spent on payroll costs, the total loan amount, and certifications regarding compliance with PPP loan requirements.
Deductibility of PPP Expenses
The CARES Act had indicated that forgiven PPP loan amounts would not constitute taxable income, despite the customary tax rules surrounding cancellation of debt. Nevertheless, the Treasury Department subsequently issued guidance prohibiting the deduction of expenses paid for with forgiven PPP loan amounts, essentially undoing the tax benefit provided by the CARES Act. The new Act now overrules that guidance, making it clear that borrowers may deduct PPP expenses for which they have received forgiveness or for which forgiveness is expected.
Other Relief Provisions
Grants for Shuttered Venue Operators
Grants are available to certain eligible operators of live venues, theatrical productions, live performing arts organizations, museums, and motion picture theatres and talent representatives who were operational as of February 29, 2020, and had gross earned revenue during the first, second, third or fourth quarter of 2020 that was at least 25% less than during the same quarter in 2019. Grants are capped at $10 million for the first round, followed by a second supplemental round in early 2021 that can be up to 50 percent of the original grant. The first round of grants will be awarded in tranches and are prioritized first to those with the largest revenue losses. The initial 14-day tranche will be awarded to eligible recipients that incurred a revenue loss of 90 percent or more, and the second 14-day tranche will be awarded to eligible recipients that incurred a revenue loss of 70 percent or more. Following the initial two tranches, grants may be awarded to any eligible recipient. The SBA’s Office of Disaster Assistance is responsible for managing the grants.
Repeal of PPP Forgiveness Reduction on Account of EIDL Advances
Under the SBA’s Economic Injury Disaster Loan program, as modified by the CARES Act, the SBA could make emergency advances of up to $10,000 within 3 days after an application was received, based on an applicant’s self-certification under penalty of perjury. PPP loan forgiveness was reduced, however, by the amount of any such emergency advance. This reduction is now repealed by the Act, and PPP borrowers may reapply for forgiveness to receive the difference.
Termination of Federal Reserve Programs
The Act defunds and formally terminates the Main Street Lending Program, which provided loans to small and midsize businesses that were too large to qualify for, or needed additional support beyond, PPP. The Fed’s special purpose vehicle will cease purchasing participations in eligible loans under the Main Street Lending Program on January 8, 2021. After December 31, such purchases will be limited to participations in loans initially submitted through a lender portal on or before December 14, 2020.
Other Tax Deductions
Deduction for Business Meals
The Tax Cuts and Jobs Act in 2017 limited the deduction for many business meals to 50% of the amount paid. Thanks to the Act, however, expenses for business meals provided by a restaurant paid or incurred after December 31, 2020, and before January 1, 2023, are fully deductible.
The Act extends the above-the-line charitable deduction established by the CARES Act through 2021. Taxpayers who are married filing jointly will be able to take the standard deduction and still deduct up to $600 in charitable giving for 2021. The Act also extends through 2021 the CARES Act’s revised charitable deduction limits, which enable individuals and corporations that itemize to deduct much greater amounts of their cash contributions. Individuals can elect to deduct donations up to 100% of their 2021 adjusted gross income (up from 60%) and corporations may deduct up to 25% of their taxable income (up from 10% previously).
Payroll Tax Provisions
Employee Retention Tax Credit
The Act enhances and extends the employee retention tax credit (ERTC) established by the CARES Act for businesses impacted by shutdown orders or significant declines in revenue. The original rules provided a credit of 50% of the qualified wages of employees, plus the cost of continuing health coverage, paid after March 12, 2020, and before January 1, 2021. The Act extends the ERTC through July 1, 2021, reduces the degree of revenue decline required for eligibility and other eligibility requirements, and increases the amount of the ERTC to 70% of qualified wages and health coverage costs. The Act also increases the maximum ERTC amount from $5,000 for all qualified wages paid to an employee during 2020 to $7,000 for each of the first two quarters of 2021, so that the maximum available credit per employee is $14,000 for 2021.
Previously, businesses that participated in PPP were prohibited from using the ERTC. Now, businesses can take advantage of both PPP and the ERTC in 2020 and 2021, so long as the same wages are not used both to obtain PPP loan forgiveness and the ERTC.
Elective Deferral of Social Security Taxes
In August 2020, President Trump announced a program whereby employers could elect to defer withholding and payment of their employees’ share of Social Security taxes on certain wages paid between September 1, 2020 through December 31, 2020. The Act postpones the deadline for payment of the deferred taxes under this program from April 30, 2021, until December 31, 2021.
Extension of Refundable Tax Credits
The Families First Coronavirus Response Act, signed into law back in March, provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave to their employees for leave related to COVID-19 through December 31, 2020. The Act extends these refundable tax credits for the period through March 31, 2021.
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If you have any questions about your eligibility for PPP or other relief afforded by the Act, please contact Jason Navarino, Rich Lomuscio, Hannah Greendyk or any member of Riker Danzig’s Corporate Department. If you have any questions about the tax aspects of the Act, please contact Jason Navarino, Bob Daleo, Hannah Greendyk or any member of Riker Danzig’s Tax Department.