The Consolidated Apportionment Act of 2021, signed by President Trump in late December, authorized $285 billion of funding for a new round of PPP loans. Loans are available to borrowers that previously received a PPP loan and to first-time borrowers. The SBA released application forms last week and opened their lender portal this week to a limited number of lenders to help underserved businesses get first access to PPP funds.
The SBA’s Portal will open Friday, January 15th for lenders with assets under $1 billion, and opens Tuesday, January 19th for all other lenders. Eligibility requirements have changed from the previous program.
Available Funds
- $30 Billion to be processed by community financial institutions and small depository institutions
- $35 billion for first-time borrowers including $15 billion for small businesses (fewer than 10 employees or loans under $250,00)
- $25 billion for second draw small business borrowers (fewer than 10 employees or loans under $250,000)
Loan terms remain at 1% with a 5-year term. No collateral or personal guarantees are required.
Deadline to apply: March 31, 2021 (unless funds are exhausted sooner)
Ineligible Borrowers
- Businesses not in operation on February 15, 2020
- Businesses that are permanently closed. Businesses that are temporarily closed remain eligible.
- Entities receiving a Shuttered Venue Operator Grant
- Publicly traded companies
- Entities not eligible for SBA 7(a) program loans
Eligible Borrowers – First Draw Loans (maximum loan $10 million)
- Businesses with 500 or fewer employees (based on headcount, not full-time equivalent)
- Sole proprietors, independent contractors, self-employed
- Farmers and ranchers
- Nonprofits including religious organizations
- 501(c)(6) organizations with fewer than 300 employees
- News organizations and housing cooperatives
Eligible Borrowers – Second Draw Loans (maximum loan $2 million)
- Businesses with fewer than 300 employees
- Suffered a reduction of 25% or more in gross receipts in any calendar quarter of 2020 compared to the same quarter of 2019 or a 25% reduction in 2020 gross receipts compared to 2019 gross receipts.
- PPP loan proceeds are not included in 2020 gross receipts
- Must have used, or will use, the full amount of the first loan on eligible expenses before the second loan is funded. Submitting a forgiveness application for the first loan is not required to obtain a second loan. Additional guidance is expected regarding this requirement.
- Cannot have more than 20% ownership by entities formed in China or Hong Kong or have board members that are residents of China
Certifications – all borrowers must certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. It is uncertain if the SBA will apply the “necessity” safe harbor from the prior PPP loan program to loans obtained in this new round of PPP loans.
Loan amount is based on 2 1/2 months of average payroll costs for 2019 or 2020 or the twelve months prior to obtaining the loan. Hotels and restaurants can use 3 1/2 months of average payroll costs.
First draw borrowers that have not yet submitted their forgiveness application and qualify for a larger loan amount than their existing loan are now able to request additional loan proceeds. A larger loan may be available if borrowers returned a portion of the original loan or revised guidance issued after the loan was obtained would allow for a larger loan (can impact partnerships, farmers/ranchers, and seasonal employers). SBA released guidance on January 13 for these additional draws.
Covered Period to use loan proceeds on eligible expenses – between 8 and 24 weeks. Loans will be forgiven if:
- Employee and compensation levels are maintained
- Loan proceeds are spent on eligible costs
- At least 60% of the proceeds are spent on payroll costs
Eligible expenses have been expanded to include more categories. Like the previous round of PPP loans, borrowers can have their loans forgiven if the proceeds are spent on eligible expenses with at least 60% spent on payroll costs. These eligible expense categories can also be used by borrowers with existing PPP loans that have not yet submitted their applications for loan forgiveness.
- Payroll costs (capped at annualized compensation of $100,000 per employee plus the cost of employer provided insurance, retirement benefits and state and local taxes assessed on employee compensation). A different cap applies for owner/employees of partnerships and corporations.
- Cost of employer paid group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums.
- Mortgage interest payments (but not mortgage prepayments or principal payments). Debts must be incurred prior to February 15, 2020.
- Rent payments on leases dated before February 15, 2020. (Rents paid to related parties may be limited)
- Utility payments for service that began before February 15, 2020.
- Operations expenditures (payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.)
- Property damage costs (costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation).
- Supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that—(A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.)
- Worker protection expenditures ((A) operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency with respect to the COVID–19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.)
Tax treatment of the portion of the loan that is forgiven – proceeds are not taxable income and the expenses paid with the proceeds are deductible.
- Many states, including California, do not currently conform to this federal tax treatment
- For pass-through entities such as partnerships and S-Corps the debt forgiveness is treated as tax exempt income and increases tax basis in the year the loan is forgiven.
- Owners of entities with taxable losses in 2020 may not be able to fully deduct their loss due to basis limitations and the timing difference created by debt forgiveness.
Other changes made by the Consolidated Appropriations Act of 2021:
- Created a simplified forgiveness process for existing PPP loans under $150,000. SBA is expected to release a one-page forgiveness application shortly.
- Repealed the requirement that PPP borrowers deduct the amount of any EIDL advance (grant) received from their forgiveness amount.
- Made expenses paid with PPP funds deductible.
- Treats EIDL advances the same as PPP loans so proceeds are nontaxable and expenses paid with advances remain deductible.
- Clarified that SBA loan payments made by the SBA on behalf of borrowers (as authorized by the CARES Act) are not taxable income and the interest and fees paid by the SBA remain deductible.
- Expanded the program to resume 3 months of payments (capped at $9,000 per month) beginning in February 2021.
- Employee Retention Credit was enhanced and expiration extended to June 30, 2021.
- Reversed CARES Act requirement so PPP loan borrowers can claim the Employee Retention Credit retroactively to March 2020.
- The same payroll costs cannot be used as both an eligible PPP loan expense and qualified payroll for the credit. Therefore, borrowers that qualify for the credit and have not yet submitted their forgiveness applications should review the eligible expenses used for forgiveness. Claiming fewer payroll costs and additional other costs may allow for a larger credit with no decrease in the forgiven amount.
Please contact us if you have any questions about the new Paycheck Protection Program.