Yesterday, Congress passed the first significant COVID-19 stimulus package since it passed the CARES Act nearly nine months ago. While the stimulus bill includes other significant assistance programs and technical corrections and extensions for many tax provisions, this First Alert is focused on those provisions that are likely to have the greatest impact on our clients.
Deductibility of Expenses Paid With PPP Loan Proceeds
Following the passage of the CARES Act, the IRS published Notice 2020-32, which confirmed the IRS position that no deduction would be allowed under the Internal Revenue Code (the “Code”) for an expense that was otherwise deductible if the payment of the expense results in forgiveness of a Payroll Protection Program (PPP) loan and the income associated with that forgiveness would be excluded from gross income for purposes of the Code. Since that time, PPP loan recipients and tax professionals have been looking to Congress to overrule the IRS and provide
tax-free forgiveness of loan proceeds and deductibility of expenses paid with PPP funds, which Congress had stated was its intent all along. Section 276 of Division N of the latest bill does just that, providing that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”
This rule applies to all borrowers, including those that have already applied for forgiveness. Therefore, Congress has now confirmed that expenses paid with PPP funds are now completely deductible.
Changes to PPP Loan Program
The new stimulus package also provides an additional $35 billion for PPP loans to those who have not yet taken advantage of the program. For those with existing loans, the bill makes several changes to the existing program. However, if a borrower has already applied for forgiveness, the changes discussed below will not apply to that loan.
Additional Expenses Eligible for Use/Forgiveness
The bill gives PPP borrowers who have not yet applied for forgiveness the opportunity to use loan proceeds for four additional categories of expenses and to then be forgiven. As outlined below, the four new categories of expenses are non-payroll costs, so they are subject to the same limitation that the sum of all non-payroll costs cannot exceed 40% of the total amount eligible for forgiveness. The four new categories of expenses are:
Covered Operations Expenditures (i.e., payments for any business software or cloud computing service that facilitates business operations, product or service delivery, payroll, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses);
Covered Property Damage Costs (i.e., costs related to property damage/vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance);
Covered Supplier Costs (i.e., expenditures to a supplier of goods that are essential to the operations of the entity at the time at which the expenditure is made, or are made pursuant to a contract that was either (i) in effect at any time before the covered period, or (ii) with respect to perishable goods, in effect before or at any time during the covered period); and
Covered Worker Protection Costs (i.e., operating or capital expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the HHS, the CDC, or OSHA during the period beginning on March 1, 2020, and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires).
Changes to the Definition of "Covered Period"
Only those PPP proceeds paid or incurred during the "covered period" are eligible for
forgiveness. Prior to the passage of the new stimulus package, borrowers could only select either an eight- or 24-week covered period. The bill, however, gives a borrower the right to choose any covered period beginning on the date a borrower receives the loan and ending on the date selected by the borrower that occurs during the period beginning on the date that is eight weeks after such date of origination and ending on the date that is 24 weeks after such date of origination (i.e., a borrower no longer has to choose between an eight- or 24-week period; instead, they can choose any period lasting between eight and 24 weeks).
Streamlined Forgiveness for PPP Loans Less
The bill confirms the long-rumored, streamlined forgiveness for loans of less than $150,000 as those borrowers will only be required to submit a one-page online or paper form and will only be subject to audit if they commit fraud or use the proceeds for improper purposes. It also appears that a small borrower will not be subjected to the reduction of forgiveness amounts generally caused by cutting salaries or eliminating jobs.
Additional PPP Loans
In addition to expanding upon the first tranche of PPP loans, the bill creates a second round of loans for those who have already borrowed and fully expended their original PPP proceeds. For these borrowers, the loan is generally determined by multiplying 2.5 by the average monthly payroll for 2019, limited to $2 million; provided, however, that restaurants and others that provide accommodation services (NAICS 72 Entities) will be permitted to borrow 3.5 times average monthly payroll, again limited to $2 million.
More importantly, eligibility for a second round of borrowing is more stringent than before. A borrower will have to have fewer than 300 employees (down from 500) and must be able to establish, in general, that they experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019. At this point, guidance on determining gross receipts is absent, but the bill does require the SBA to issue regulations within 10 days of the passage of the bill.
One important note: Because PPP borrowers now also may claim the Employee Retention Credit (see explanation below), any wages
for which a credit is computed will not be treated as forgivable payroll costs for purposes of the PPP.
Employee Retention Credit
The new stimulus bill also extends the Employee Retention Credit for the first and second quarters of 2021 and greatly expands several aspects of the credit for amounts paid in the first two quarters of 2021. First, the credit percentage is increased from 50% to 70% of qualified wages. Qualified wages, in turn, are increased from $10,000 in total per employee to $10,000 per quarter per employee, while the limitation of qualified wages that once occurred above 100 employees now does not kick in until employees exceed 500. In addition, a mere 20% drop in quarter-over-quarter receipts are
now required to make a quarter an “eligible quarter,” rather than the 50% initially required by the CARES Act.
Most importantly, the prohibition on taking the Employee Retention Credit for those borrowers who received a PPP loan is removed, so PPP loan borrowers now also can take the Employee Retention Credit. Borrowers will be able to apply for back credits.
As previously noted, the items mentioned above are only some of the provisions that will impact our clients. With the full text of the second stimulus bill released just yesterday, we expect and hope to see additional guidance from
federal and state agencies in short order. We will continue to monitor developments as they become available.