Here’s how to make the next round work for your business.
Signed into law on December 27, 2020, the new COVID-19 stimulus package contains $900 billion in additional relief to businesses and individuals. Among other things, the new bill expands the Coronavirus Aid, Relief and Economic Security (CARES) Act’s Paycheck Protection Program (PPP), which was enacted on March 27, 2020.
To help you identify PPP provisions applicable to your business, we’ve unpacked major aspects of the new funding bill.
Round 1 vs. Round 2 of the PPP
Both rounds share the common goal of providing forgivable loans to small businesses hit hard by the COVID-19 pandemic. However, they are different in several ways, as demonstrated below.
Total appropriation amount
Round 1 appropriated $669 billion in PPP loans to small businesses. (The initial amount of $349 was depleted in no time, prompting Congress to add another $320 billion.) This first round expired on August 8, 2020.
Round 2 (i.e. the new stimulus package) appropriates $284 billion in PPP loans to small businesses.
Maximum loan size
Round 2 has a maximum loan size of $2 million, decreasing from $10 million in Round 1. This means Round borrowers cannot receive more than $2 million in PPP loans.As before, eligible businesses can obtain PPP loans of up to 2.5 times their average monthly payroll costs. Round 2 offers an exception to this rule: qualified accommodations and food services entities can receive PPP loans of up to 3.5 times their average monthly payroll costs.
Importantly, Round 2 has a maximum loan size of $2 million, decreasing from $10 million in Round 1. This means Round borrowers cannot receive more than $2 million in PPP loans.
The interest rate remains at 1%.
Use of PPP loans
As previously required, PPP borrowers must spend at least 60% of their loan on payroll expenses. Borrowers can spend the remaining 40% on rent, utilities, and mortgage interest.
Importantly, Round 2 adds eligible expenses, such as covered:
- Operations costs, including payments for cloud computing services or business software that assist with human resources, payroll, and accounting functions
- Worker protection costs, such as for personal protective equipment (PPE) and compliance-related expenses stemming from COVID-19 guidance issued by the CDC, HHS, OSHA, or the state or local government
- Property damage costs, such as for uninsured property damages caused by public disturbances in 2020
- Supplier costs, including payments for goods that were deemed essential to the business’ operations when the purchase was made
Additional group insurance
Previously, PPP borrowers could not include additional group insurance costs (beyond health insurance) when figuring their PPP payroll costs.
Round 2 broadens the definition of “payroll costs” to include certain group insurance, such as life, dental, vision, and disability insurance payments.
Loan usage period
Initially, Round 1 borrowers had to use their PPP loans within 8 weeks in order to have their loans forgiven. However, back in June 2020, the Paycheck Protection Program Flexibility Act expanded the PPP loan usage period to 24 weeks.
Round 2 permits PPP borrowers to choose either the 8-week period or the 24-week period.
Previously, applicants could not receive PPP loans if they were in bankruptcy proceedings. This prohibition ended up in litigation, with some courts deeming the prohibition as unenforceable. Since then, there’s been a lot of confusion on this issue.
Round 2 appears to clear the matter up, by creating a special procedure that makes it possible for certain small businesses in Chapter 11 bankruptcy to qualify for PPP loans.
Who can apply for the new PPP funding?
Round 2 loans are available to first-time borrowers and specific second-time borrowers.
Eligible first-draw borrowers include:
- Businesses with 500 or fewer employees
- Independent contractors
- Sole proprietors
- Self-employed individuals
- Nonprofit organizations
- Certain news organizations
- Accommodations and food services operations with no more 500 employees per physical location
Eligible second-draw borrowers must satisfy these 3 criteria:
- Have 300 or fewer employees
- Have used or will use all of their first PPP loan
- Demonstrate at least a 25% decrease in gross revenue during any 2020 quarter, as compared to the same quarter in 2019
Eligible second-draw entities include:
- Some nonprofit organizations
- Housing cooperatives
- Tribal businesses
- Veterans’ organizations
- Independent contractors
- Sole proprietors
- Self-employed individuals
- Small agricultural cooperatives
Set-asides for very small or underrepresented businesses
Round 2 sets aside funds for very small businesses, minority-owned businesses, and businesses in low-to-moderate-income neighborhoods.
- $15 billion for first-draw borrowers with 10 or fewer employees, or for loans under $250,000 to borrowers in low- or moderate-income areas
- $25 billion for second-draw borrowers with 10 or fewer employees, or for loans under $250,000 to borrowers in low- or moderate-income areas
- $15 billion for loans issued by community lenders, such as minority depository institutions and community development financial institutions
- $15 billion for certain loans made by small depository institutions
- $25 million for minority business development centers, to provide technical assistance for minority businesses seeking PPP loans
The new stimulus bill (or Stimulus 2.0) sets aside $20 billion for the Economic Injury Disaster Loan (EIDL) advance/grant program, which includes grants for businesses in low-income areas.In its 3-page guidance, the United States Small Business Administration explains its steps to increase PPP access for minority, underserved, veteran, and women-owned businesses. This includes accepting “PPP loan applications only from community financial institutions for at least the first two days when the PPP loan portal re-opens,” and directing “lender match borrower inquiries to small lenders who can aid traditionally underserved communities.”
Note: The new stimulus bill (or Stimulus 2.0) sets aside $20 billion for the Economic Injury Disaster Loan (EIDL) advance/grant program, which includes grants for businesses in low-income areas.
Grants for the arts and culture sector
Stimulus 2.0 appropriates $15 billion to live venues, theatres, museums, and zoos that have closed because of the COVID-19 pandemic. To qualify for the grant, these businesses must prove that they suffered revenue losses of at least 25%. They can opt to apply for a PPP loan or the grant; they cannot choose both.
Tax treatment of forgiven PPP loans
Back in August 2020, we posted an article on Internal Revenue Service treatment of expenses paid with forgiven PPP loans. Basically, the IRS prohibited PPP borrowers from taking tax deductions for expenses paid with the forgiven portion of their loan.
As stated in the article, “The IRS is essentially saying that PPP borrowers cannot have the PPP expenses qualify for loan forgiveness and then turn around and claim those same expenses as tax deductions.” At the time, Treasury Secretary Steven Mnuchin argued that this would be “double-dipping,” which businesses are not allowed to do.
Disagreeing with the IRS’ position, Congress began to pursue a legislative fix that would enable tax deductions for expenses funded by forgiven PPP loans. This finally happened through Stimulus 2.0, which allows expense deductions for current PPP loans and PPP loans authorized under Stimulus 2.0.
In addition, Stimulus 2.0 states that forgiven PPP loans are fully tax exempt and should not be treated as taxable income.
Tax write-offs for PPP expenses
Stimulus 2.0 clarifies that businesses can write off expenses paid with PPP funds (such as for payroll, rent, and utilities), like ordinary business expenses.
Note: You cannot use your PPP loan to pay your business taxes. PPP funds can be used only for specified items, such as payroll, rent, utilities, PPE, business software, and other eligible expenses.
You cannot use your PPP loan to pay your business taxes. PPP funds can be used only for specified items, such as payroll, rent, utilities, PPE, business software, and other eligible expenses.
Employee Retention Tax Credit (ERTC)
Pursuant to the CARES Act, eligible employers can claim an employee retention tax credit against 50% of qualified wages paid to employees from March 13, 2020 to December 31, 2020. The annual maximum wages per employee was $10,000, thereby capping the ERTC at $5,000 per employee.
Stimulus 2.0 extends the ERTC to June 30, 2021 and increases the ERTC rate to 70% (or $7,000 per employee) for the first 2 quarters of 2021. What’s more, the bill allows eligible employers to receive a PPP loan and the ERTC for 2020 and 2021, provided the same payroll expenses are not used for both.
Economic Injury Disaster Loan grants/advances
Prior to Stimulus 2.0, if a PPP borrower received an EIDL grant, then the amount had to be deducted from their PPP loan forgiveness total. Stimulus 2.0 eliminates this requirement, which means the PPP borrower’s EIDL grant will no longer reduce their PPP loan forgiveness amount.
Loan forgiveness application simplified
The loan forgiveness application for PPP loans of up to $150,000 has been streamlined into a 1-page certification.
Eligible borrowers with PPP loans of up to $150,000 can now submit a 1-page certification stating the:
- Number of employees the borrower was able to keep because of the PPP loan
- Estimated portion of the loan spent on payroll costs
- Total loan amount
In addition, the borrower must attest that they:
- Accurately provided the required certification
- Complied with the rules set forth under the PPP
These PPP borrowers must retain for at least 4 years all employment records associated with the loan forgiveness. All other records relevant to the PPP must be kept for at least 3 years.
Note: The records retention period for both the standard and EZ loan forgiveness applications is still 6 years.
When does the new PPP start?
The PPP begins on January 11, 2021 for first-draw borrowers, and on January 13, 2021 for second-draw borrowers. However, restrictions have been placed on those dates.