Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act
On December 22, 2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”), the new COVID-19 relief bill, that modified and introduced the second round of the Paycheck Protection Program (the “PPP”), providing in an additional $284 billion in funding to small businesses in the United States. On December 27, 2020, President Trump signed the bill, making the benefits of the PPP available to affected businesses across the country. The PPP is a loan program that was introduced as a part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Small Business Association (the “SBA”) backs the loans from lenders, which are typically traditional banks. The second round of the PPP is similar in many ways to that of the first round. Businesses that meet the criteria determined by Congress can qualify for a fully forgivable loan, so long as the funds are spent in enumerated ways. Please note that official guidance and regulations related to this second round of the PPP have not yet been provided by the SBA and must be provided within 10 days of the enactment of the Act.
The second round of the PPP is designed to provide businesses with a fully forgivable loan to offset lost profit and revenue in 2020. As part of the Paycheck Protection application form, businesses provide the lender with financial documentation such as payroll processors records, payroll tax filings, payroll tax forms from 2019, and Form 1099-MISC records. The loan will be fully forgivable (meaning that business would not need to pay back the principal and interest from the loan) if at least 60% of the loan is spent on “payroll costs.” Payroll costs under the PPP are defined as follows:
- Salary, wages, commissions, tips, bonuses (capped at $100,000 per year for each employee);
- Employee benefits, including vacation medical and sick leave; and
- State and local taxes levied on income.
Further, the remainder of the loan must be spent on other “eligible expenses.” The Act expanded the number of eligible expenses that business can apply towards the remaining 40% of the loan. The first round of the PPP limited eligible expenses to only mortgage interest payments, rent and lease payments, and utilities. In contrast, Act has expanded the meaning of eligible expenses by adding, in addition to those eligible expenses listed in the first round, the following eligible expenses:
- Operation expenditures such as software, cloud computing, human resources and accounting;
- Property damage costs from public disturbances that were not covered by insurance;
- Supplier costs, and
- Worker protection expenditures, such as personal protection equipment (“PPE”) or workplace improvements to enhance worker safety and COVID-19 compliance.
Should the loan not be forgiven, the loans carry an interest rate of 1% with a term of 5 years in which payments can be deferred for up to 10 months after the covered period ends.
The Act is available to only certain business entities that meet the enumerated criteria. Businesses that qualify for the second round of the PPP loans must meet the following operational criteria:
- Must have been in operation prior to February 15, 2020;
- Must have 300 employees or fewer (in contrast to the first round requirement of 500 employees or fewer); and
- Must show a 25% or more reduction in gross receipts from any one quarter in 2020 compared to 2019.
Further, the Act allows for additional business-type entities to be able to participate in the second round, such as trade organizations, religious organizations, nonprofit organizations and government entities that engage in tourism, and local newspapers, television, and radio stations. Businesses that are ineligible to participate in the second round of the PPP are financial businesses primarily engaged in lending, publicly traded companies, businesses primarily engaged in political or lobbying activities, businesses organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, businesses that have a member of its board of director that is a resident of the People’s Republic of China, or any person required to register as a foreign agent.
Similar to the calculation in the first round, the amount of the loan is determined to be 2.5 months of the business’s monthly payroll costs, capped at and up to $2 million. The average monthly payroll costs is computed using a one year period before the loan application and determining the average monthly costs from that year period, i.e. the calendar year of 2019. Certain industries (such as the food and accommodation industries, seasonal businesses, new businesses, sole proprietors, partnerships and independent contractors without payrolls) have certain exemptions and varying methods of calculating monthly payroll costs. Restaurants and food businesses have unique calculations whereby it can receive a larger loan amount of 3.5 months of average monthly payroll. For example, a small business with an average monthly payroll of $100,000 in 2019 would qualify for a loan of up to $250,000, while a restaurant or food business with the same average monthly payroll would qualify for a loan of up to $350,000. If the business had previously utilized the first round of the PPP but did not take the full loan amount or returned a portion of that loan amount, then the business can apply for the remaining or returned loan amount, so long as it has not already applied for forgiveness from the SBA.
The Act also provided that the loans forgiven under both the first and second round of the PPP will not be taxable to the business owners. Prior to this explicit provision in the Act, the IRS issued guidance stating that PPP borrowers could not expense their wages or other qualifying costs that they used with their PPP funds if the loan was ultimately forgiven – which effectively meant that the IRS was taxing the small business for the loan. Now, Congress has explicitly rejected this IRS interpretation so that the borrowers can have their PPP loans forgiven and still be able to deduct their payroll and other qualifying expenses.
Loans of less than $150,000 will have a simplified forgiveness application (which are anticipated to be available by January 20, 2021) whereby the simplified application will be a one-page from that includes certain loan information and certifications form the business owner that the loan funds were used properly. Such a process is similar to the loans of less than $50,000 in the first round of the PPP.
For more information on the PPP and the Act, please feel free to reach out to one of our highly qualified and experienced tax attorneys.