On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act was signed into law, providing $900 billion in aid to Americans suffering from economic fallout. In addition to the funds allocated to unemployment benefits, direct payments, and other areas struggling in the face of the pandemic, the federal government approved $284 billion in loans for eligible small businesses.
Considering the tremendous impact that the pandemic has had on small businesses, the legislation delivers the much-anticipated second round of the Paycheck Protection Program (PPP) loans following the program first implemented by the CARES Act in March 2020. The program provides forgivable loans to small businesses in efforts to keep employees on payroll. The restarted PPP extends through March 2021 and features vast changes to its predecessor, such as greater flexibility in utilizing loan proceeds and expanding eligible businesses.
Small businesses may qualify for a second PPP loan
In efforts to provide additional help to struggling businesses, a second PPP loan is now available for those that qualify. The following three limitations continue to apply for eligible business:
- Employs no more than 300 employees
- Has used/will use the full amount of the first PPP loan
- Had gross quarterly receipts from 2020 that reflect no less than a 25% sale reduction from the same quarter in 2019
In previous drafts of the new legislation, lawmakers required a 50% sales reduction exhibited through gross receipts. The modification of this requirement allows for a greater number of businesses to now qualify.
The government expects loan amounts to be nearly identical to what the borrower received during the initial PPP loan; however, the loan amount can no longer exceed $2 million per borrower compared to the $10 million cap during the initial round of PPP loans.
Eligible businesses are projected to receive a loan equal to 2.5 times their monthly payroll expenses.
PPP eligibility expanded to include a wider array of organizations
To address the overabundance of organizations negatively impacted by the pandemic, the second round of PPP determined that nonprofits and news outlets are now eligible for loans. Venues, theaters, and cultural institutions received an additional $15 billion in assistance compared to the initial PPP loans. To assist very small businesses in low-income and minority communities, lawmakers specifically reserved $12 billion.
Additionally, the legislation includes $20 billion for targeted Economic Injury Disaster Loans grants through the Small Business Administration. This new lifeline will be essential for some of the smallest businesses centered in low-income communities.
However, businesses that are owned (20% or more) by residents of the People’s Republic of China no longer qualify for a new PPP loan.
Loans can now be used on additional business expenses
To have PPP loans forgiven, borrowers of $150,000 or less need to submit a one-page certification that includes:
- How many employees the borrower retained as the result of the loan
- An estimate on how much of the loan was used to cover payroll
- The total loan amount
For the loan to be fully forgiven, 60% or more must be used on payroll expenses. The second round of PPP allows for a broader selection of business expenses that the remaining 40% can be used to pay for. In addition to basic operational costs (such as rent and utility payments) the loan can now be used to cover funds spent to meet COVID restrictions and other costs.
Expenses paid for with PPP loans can still be claimed on tax returns
The Act specifies that a forgiven loan will be treated as tax-free. Additionally, payroll and operating expenses paid for with the tax-free loan can still be deducted on the borrower’s tax return.
This inclusion is contested by different parties. Tax policy experts are concerned about taxpayers providing more than their fair share with this arrangement. Having already provided the funds for the PPP grants, much of the public is debating if borrowers should be allowed to deduct these costs as regular business expenses.
However, it is undisputable that many small businesses are struggling to survive during the pandemic and additional tax breaks can serve as a huge source of relief.