After several months of negotiations, Congress passed additional COVID-19 relief legislation on Monday, December 21, 2020, which was signed into law by President Trump on Sunday, December 27, 2020. The $900 billion stimulus bill, named the Consolidated Appropriations Act, 2021, includes several provisions regarding the Paycheck Protection Program (“PPP”), which was established by the CARES Act in March to provide eligible businesses with cash to be used for payroll costs and certain non-payroll expenses.
Deductibility of PPP Expenses
One of the most notable provisions in the new legislation is the ability of borrowers to fully deduct expenses paid with the PPP loan proceeds.
If a borrower uses its PPP loan entirely for eligible expenses, it may qualify for forgiveness for all or part of its PPP loan. The CARES Act provides that such loan forgiveness does not constitute taxable income to the borrower. However, in April and November, the IRS issued guidance indicating that borrowers could not deduct expenses paid using the forgiven proceeds. The new legislation reverses this IRS guidance and allows borrowers to fully deduct any expenses paid using their forgiven PPP loan proceeds.
Second Draw PPP Loans
The law appropriates an additional $284 billion in funding to the PPP for loans made specifically to businesses with 300 or fewer employees. These businesses must show a 25 percent reduction in gross receipts in any 2020 quarter compared to the same 2019 quarter. This round of PPP is more restrictive for businesses than the original, which demonstrates legislative intent to focus on businesses that have been hit the hardest.
The second draw PPP loans are capped at the lesser of either $2 million or 2 ½ times average monthly payroll costs. However, if the borrower is in the accommodation or food service industry, it can use a 3 ½ times multiple instead to calculate its loan amount.
In order to receive full forgiveness, 60 percent of the loan proceeds must still be used on payroll, with the other 40 percent used on eligible costs. Other eligible costs now include personal protective equipment, operations expenditures such as software, supplier costs, and property damage costs, in addition to the previously-recognized mortgage, rent, and utility expenses.
The SBA is required to establish new regulations regarding the second draw PPP loans within ten days after the Consolidated Appropriations Act, 2021 is signed into law, which seems achievable considering the SBA originally set up the program in March just a week after Congress passed the CARES Act.
PPP loans will continue to be issued by financial institutions, including banks and credit unions. In August, the SBA reported 5,460 lenders taking part in the program.
In addition to the PPP provisions discussed above, the new law also includes:
- another round of individual stimulus checks;
- an extension of the payroll tax credits;
- enhanced unemployment insurance;
- $15 billion for airline payroll support;
- $82 billion for schools and $10 billion for child care;
- $15 billion for the SBA to make grants to theaters and live performing arts organizations;
- 100% deductibility of business meals in 2021 and 2022;
- approximately $30 billion for procurement and distribution efforts for the COVID-19 vaccine;
- $25 billion in rental assistance; and
- a $300 charitable contribution deduction for individuals who do not itemize in 2020 and 2021 (married couples may deduct $600 in 2021).
The Business and Corporate attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist our clients with various business matters, including matters pertaining to the Paycheck Protection Program. Please contact Dvorak Law Group for specific questions and recommendations regarding your business.