PPP Loans - Comprehensive Update
We would like to provide you with a comprehensive update concerning PPP Loans given the recently enacted Consolidated Appropriations Act of 2021 (“CAA”). The CAA was enacted on December 27, 2020.
DEDUCTION ALLOWED & ADDITIONAL ELIGIBLE COSTS
The CAA provides the much-anticipated clarification to the CARES Act allowing for the deduction of eligible costs contributing to PPP loan forgiveness. The clarification was made retroactive to the CARES Act. Prior to this clarification, the IRS held such costs as nondeductible per their Notice 2020-32 and Revenue Ruling 2020-27. Borrowers applying for loan forgiveness now have certainty regarding the deductibility of eligible costs.
The CAA also expanded upon the types of eligible costs that may contribute towards loan forgiveness. Eligible costs now include covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Please see our attached outline covering the CAA’s definition of these costs for your reference. We expect guidance will be issued further explaining these additional costs. The eligibility of these costs was made retroactive to the CARES Act. Therefore, borrowers that have already received a PPP Loan in 2020 may include these additional eligible costs in computing their loan forgiveness. However, these additional eligible costs are not available for loans that had already been forgiven as of the enactment of CAA.
Lastly, the CAA now allows forgiveness of EIDL Advances. Previously, the CARES Act required borrowers to reduce their loan forgiveness by any EIDL Advance received. Borrowers that have already received loan forgiveness and had their forgiveness amount reduced by their EIDL Advance, are expected to be able to amend their forgiveness application to obtain forgiveness of their EIDL Advance.
SECOND ROUND ELIGIBILITY
The CAA also provides for a second round of PPP loan funding made available through March 31, 2021. Borrowers that already received a PPP loan in 2020 may be eligible for a second loan if they employ no more than 300 employees, have used (or will use) the full amount of their first loan, and experienced a reduction in gross receipts of at least 25% in any quarter during 2020 in comparison to the same quarter in 2019.
Taxpayers that have not yet received a loan may also be eligible to obtain a PPP loan during this second round of funding if they employ no more than 500 employees or if they meet the Small Business Act employee-based size standards for their respective industry. Also, taxpayers must be in operation by February 15, 2020 to be eligible for a PPP loan. Lastly, it is unclear whether loans issued during this second round of funding have a necessity requirement similar to the original round of funding (i.e. requiring all borrowers to certify the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant as of the date of the loan application).
LOAN AMOUNT
Second PPP loans are capped at the lesser of $2,000,000 or 2.5 times average monthly payroll during the one-year period before the loan is made (or for calendar year 2019). However, second PPP loans for borrowers under NAICS Section 72 – The Accommodations and Food Services Sector (i.e. hotels, restaurants, etc.) are capped at the lesser of $2,000,000 or 3.5 times average monthly payroll during the one-year period before the loan is made (or for calendar year 2019).
Taxpayers obtaining their first PPP loan during this second round of funding are capped at the lesser of $10,000,000 or 2.5 times average monthly payroll during the one-year period before the loan is made (or for calendar year 2019).
SIMPLIFIED FORGIVENESS
The CAA provides for a simplified loan forgiveness application (not to exceed one page) for PPP loans not exceeding $150,000. We do not believe such loans are automatically forgiven. The simplified application will require the borrower provide the number of employees retained because of the loan, the estimated amount of loan proceeds spent on payroll costs, and the loan amount. Further, the borrower will need to certify they meet loan eligibility and forgiveness criteria and retain records to substantiate forgiveness compliance. The application does not require remittal of such records. The borrower may be audited to ensure compliance.
EMPLOYEE RETENTION CREDIT
ELIGIBILITY
Under the CARES Act, the employee retention credit is a refundable credit against employment taxes for qualified wages paid by eligible employers after March 12, 2020 through December 31, 2020. The CAA extends this credit for qualified wages paid through June 30, 2021.
The CAA allows eligible employers that were recipients of PPP loans to claim this credit retroactive to the CARES Act. Previously, eligible employers that were recipients of PPP loans were prohibited from claiming the credit (per CARES Act). However, the borrower cannot use the same qualified wages for purposes of obtaining loan forgiveness or for purposes of claiming other credits including the worker opportunity tax credit (WOTC), credit for increasing research and development, paid sick and family medical leave credits, etc. Eligible employers that were recipients of PPP loans that have not yet claimed the credit in 2020 (due to the rules set forth by the CARES Act), will presumably be able to amend applicable 2020 payroll filings to claim the credit. We expect the IRS to provide procedural guidance on this issue.
Under the CARES Act, eligible employers are those operating a business during calendar year 2020 that experience either a full or partial suspension of the operation of their business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or experienced a significant decline in gross receipts. A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019, and ends on the first day of the first calendar quarter in which gross receipts are more than 80% of gross receipts for the same calendar quarter in 2019. The credit applies to qualified wages paid during this period, or any calendar quarter in which operations were suspended.
The CAA modifies the definition of eligible employer for purposes of claiming the credit in 2021. Under the CAA, an eligible employer are those operating a business during 2021 that experience either a full or partial suspension of the operation of their business because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or the gross receipts of such employer for such current calendar quarter are less than 80% of the gross receipts for the same calendar quarter in 2019. The employer may elect to use the prior calendar quarter (instead of current calendar quarter) in determining the “less than 80%” gross receipts reduction.
QUALIFIED WAGES
An eligible employer’s qualified wages depend on their number of full-time employees. Under the CARES Act, eligible employers averaging more than 100 full-time employees in 2019 include wages and health care costs paid to employees that are not providing services due to suspension of operations or significant decline in gross receipts. Eligible employers averaging no more than 100 full-time employees in 2019 include wages and health care costs paid to employees during such periods regardless of whether services are provided. The CAA changes the “100” threshold to “500” for qualified wages paid in 2021 (through June 30, 2021).
CREDIT AMOUNT
Effective January 1, 2021 the CAA increased the credit to 70% of qualified wages paid in 2021 (through June 30, 2021). The maximum amount of qualified wages (per employee) for each quarter in 2021 is $10,000. Therefore, the maximum credit (per employee) for each quarter in 2021 equals $7,000 ($14,000 total).
Prior to January 1, 2021, the CARES Act allows an employee retention credit equal to 50% of qualified wages (up to $10,000 per employee) for 2020. Therefore, the maximum credit allowable (per employee) in 2020 equals $5,000. The credit computation under the CARES Act still applies for 2020, but as previously mentioned, recipients of PPP loans can now claim the credit in 2020.
CLOSING REMARKS
The passage of the CAA has provided certainty regarding the deductibility of eligible costs that contribute to PPP loan forgiveness while also providing an opportunity for additional funding for eligible borrowers. Borrowers that have obtained a PPP loan should update their forgiveness calculations to include the additional eligible costs allowed (see following outline). Borrowers with loans not exceeding $150,000 should wait for the release of the simplified forgiveness application, but still verify they qualify for full loan forgiveness and substantiate the claim within their records. Lastly, the CAA has provided an opportunity for eligible employers that have received a PPP loan in 2020 to now claim an employee retention credit in 2020, and has extended the credit through June 30, 2021.
If you have not yet applied for loan forgiveness nor computed the amount of forgiveness, we can assist you in doing so to ensure you obtain the maximum amount of allowable forgiveness. We can also assist you in determining your eligibility for and the maximum amount of PPP funding you may apply for through March 31, 2021. Lastly, we can assist you in determining your eligibility for and the amount of your employee retention credit in 2020 and 2021.
Please do not hesitate to contact us at 248‐649‐1600 so we may discuss your specific situation in further detail.
