Key PPP Loan Issues Addressed by COVID-19 Relief Bill
Please Note: This bill has been passed by Congress but is waiting for final signature by President Trump. We will continue to monitor progress of the bill and provide updates as they are released. Update: This bill was signed by the President on December 27th.
Numerous small businesses have been waiting on the second round of the Paycheck Protection Program (PPP) loans to remain operational and to answer some questions that remained around the deductibility of expenses and forgiveness clarification.
On December 21, 2020, the U.S. Senate and House of Representatives passed a $900 billion COVID-19 relief bill which provides additional aid for small businesses, as well as more assistance to individuals. This bill also provided some clarification around the deductibility of expenses and the Paycheck Protection Program in the first draw and extended that deductibility into the second draw.
We’ve broken out some of the key issues as they relate to these expenses and loan forgivability.
Are qualified expenses paid with PPP funds deductible in the year they are paid?
Yes, regardless of whether you have received loan forgiveness or not, the qualified expenses are now deductible when they are paid and the loan proceeds are not taxable.
Is the advanced payment under the EIDL program taxable income?
No, the advanced payment under the EIDL program, where taxpayers could request up to $10,000 in advance of an EIDL loan, is now considered non-taxable income and the expenses paid with these funds are deductible as well.
What happens if I received both a first draw PPP loan and an advanced payment EIDL grant?
Under the original law, borrowers that received both had to essentially pay back the EIDL grant by reducing their forgivable PPP loan amount. The new law now allows full PPP and EIDL grant forgiveness. None of the proceeds are taxable and all the expenses paid with the funds are deductible.
Should I file the forgiveness application for my first draw PPP loan if I have not yet done so?
If your loan amount is less than $150,000, you may want to hold off on filing for forgiveness until the new, simplified form is released. Supporting documentation for your forgiveness application should still be gathered and kept on file in case the SBA requests it later but this new form will be a quicker, one-page application with no supporting documentation required.
Do I need to have my first PPP loan forgiven before I can apply for the second draw?
No, you can still apply for the second draw even if you have not applied for or received forgiveness from the first draw, so long as you have spent or anticipate spending the full amount from your first draw.
Do I automatically qualify for a second draw if I received funding for the first draw?
No, the qualifications have been modified for the second draw. Second-time borrowers with less than 300 employees AND a 25% or more revenue decline in any quarter in 2020 compared to the same quarter in 2019 will qualify for the second draw. Borrowers requesting a second draw under $150,000 will have until the time they submit their loan forgiveness application to certify that they meet the revenue loss requirements. Loans over $150,000 will need to be certified at the time of the loan application. All loans will be subject to review by SBA but reviews will be conducted randomly for smaller loans.
What if I was not in business until late 2019 or early 2020?
- If you were not in business in the first or second quarter of 2019 but were in business in the third and fourth quarter of 2019, you can compare any quarter in 2020 to the third or fourth quarter of 2019 to see if you qualify for the second draw.
- If you were not in business in the first, second, or third quarter of 2019, you can compare any quarter in 2020 to the fourth quarter of 2019.
- If you were not in business in 2019 but were in business by February 15, 2020 you can compare second, third, or fourth quarter 2020 to the first quarter 2020.
Is the gross receipts decline threshold based on an accrual or cash basis accounting method?
More guidance on this will be required but we believe it will be tested on the accounting method in which you report your tax return.
Can I apply for the second draw if I never applied for the first draw?
Yes, we believe the 25% decreased revenue threshold does not apply to first-time borrowers and the employee count increases back to the original 500 instead of 300. However, we will need additional guidance on this.
What is the maximum loan amount for the second draw?
$2 million is the maximum loan amount this round.
How do I calculate my loan amount for the second draw?
Your loan amount is calculated by using 2.5 months of your average 2019 gross compensation paid or 2.5 months of your average 12-month gross compensation paid that precedes the date of your second draw application. This allows options to maximize your loan amount. Borrowers in the Accommodation and Food Services industry with NAICS code 72 may receive loans of up to 3.5 months of average payroll costs.
What are the covered loan period options for the second draw?
Eight to 24 weeks following the date you receive your first funds. Up to 24 weeks allows borrowers to use payroll costs only, reducing the amount of supporting documentation needed. However, some borrowers may want to use a shorter covered period and use the funds to pay qualified non-payroll costs.
What are the eligible expenses to pay with funds from the second draw?
Eligible expenses are the same as first draw – payroll, rent, interest, utilities. Additionally, the second draw also includes PPE costs for employees, costs to comply with COVID-19 health and safety guidelines, costs paid to a supplier that are essential to the borrower’s current operations, and costs paid for software or cloud computing services. The 60/40 minimum split from the first draw is still applicable.
There is a lot of information to navigate in this most recent legislation. Please contact your AEM advisor to make sure you have maximized your first loan amount, to determine if you will qualify for the second draw and how to maximize the amount of your second draw.
Visit our COVID-19 Resource Center to read about the latest legislation, local news, and relevant updates around COVID-19.
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