PPP 2 – What you need to know?
Zane Stevens CA (SA)
THE accountant to the wine industry | Podcast host | NBBJ 40 under 40
Can you believe it, here we are at the start of 2021 and once again we are talking about Payroll Protection Program (PPP).
I thought we would be talking about the complexities of the accounting and tax consequences of this program, but instead we are talking about another round of applications for funding. After months of discussion and negotiation, Congress recently approved a $900 billion COVID-19 relief package under the Consolidated Appropriations Act, 2021 (CAA 2021). Included in this new coronavirus aid package is $284 billion dedicated to a second round of PPP funding. The new package also includes several updates that will impact small businesses.
There was a bit of a bump in the round with the potential of the final document not being signed but we eventually got there. The timing was less than ideal (too late and then around the holidays) but the availability of funds was really needed at a time when COVID-19 continues to rage on and business continue to close because of restrictions in place.
As has been customary, information has been slow to be released but as of writing this, applications will open on Monday January 11th, per the press release dated January 8th, 2021:
“The U.S. Small Business Administration (SBA), in consultation with the Treasury Department, announced today that the Paycheck Protection Program (PPP) will re-open the week of January 11 for new borrowers and certain existing PPP borrowers. To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11 and Second Draw PPP Loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter.”
The hope is to help Community lenders serving minority and women-owned businesses will have exclusive access to a new pot of PPP loans for at least 2 days when the next round of money becomes available. The goal is to help those hardest hit but were left short in the first round (especially round 1.1)
So PPP2, here we come. Let us dig into some of the details.
Highlights of Round 2 of the Paycheck Protection Program
- Applications are open to new and existing borrowers of PPP loans
- Updates to loan eligibility for 501(c)(6) not-for-profit organizations
- Updates to loan eligibility for borrowers in bankruptcy
- Expansion of covered expenses
Who can apply for additional PPP funding?
For round 2 of the PPP funding, both first-time and second-time qualified borrowers are eligible to apply.
First-time borrowers can apply for loans up to $10 million. Eligibility rules for first-time borrowers are the same as first time around.
PPP applicants who are seeking funding in addition to what they received in 2020 (also known as Second Draw Loans) are eligible for loans up to $2 million provided they meet the following requirements:
- Employ fewer than 300 people (down from 500)
- Have used or will use the full loan amount granted to them in their first round of PPP funding
- Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019 (if a business was out of operation for a portion of 2019, they can use different quarters to compare gross receipts.)
The 25% gross revenue decline has been one of the biggest areas of concern for me. I understand the intent to help those that have had real hardship but I do feel like this is an area that can be manipulated by creative accounting.
That being said, it is simple, but read carefully.
It relates to gross receipts of the business before expenses are subtracted.
Businesses will compare any quarter in 2020 to the same quarter in 2019 and determine if there is a decreased by at least 25%.
If you were not in business all of 2019, it sounds more complicated than really is. 1st, you had to be in operation by Feb. 15, 2020 to be eligible (this is also a requirement of the loan to begin with). If you were in business in the 3rd and 4th quarter of 2019, then you may compare any quarter in 2020 with these quarters. If you were not in business during the 1st to 3rd quarter of 2019, but you were in business in the 4th of 2019, then you may compare any quarter in 2020 with the 4th of 2019. Lastly, if you were not in business in 2019 you will compare gross receipts from the 2nd to 4th quarter to the 1st quarter of 2020.
Calculating Loan Amounts
Second Draw PPP loan borrowers can calculate their maximum loan amount by multiplying 2.5x their average total monthly payroll in:
- The one-year period before the date on which the loan is made, or
- The calendar year 2019
The maximum loan amount for Second Draw borrowers has been reduced to $2 million, down from $10 million in the first round. As in the first round, seasonal employers calculate their maximum loan amount differently.
Big, big news in the guideline, borrowers of a Second Draw PPP loan with NAICS Code 72 (e.g., hospitality, restaurants, hotels, etc.) are permitted to use a 3.5x multiplier of their average monthly payroll costs to calculate their maximum loan amount. Even though these loans are also subject to the $2 million limit, these are generally businesses that have been hit the hardest but at the same time employ a lot of people. These additional funds will be hugely helpful in keeping a few more people employed for a little bit longer.
Expansion of Covered Uses of PPP Funding
One of the major changes in the new legislation was the widening of which expense PPP money can be used. This applies to both existing PPP loans and new loans. So if you have not already applied for forgiveness on your first draw, how many have different cost that you have incurred that can be included in your calculation for forgiveness.
Important to note though that you still do need to use at least 60% of the funds on payroll costs. I personally still believe using as close to 100% of these funds on payroll is the right thing to do (in most circumstances) and will allow for the easiest forgiveness process.
The previously covered uses are still included, namely:
- Payroll
- Rent
- Covered mortgage interest
- Utilities
Covered uses for Second Draw loans and new loans for first-time borrowers now include:
- Operations Expenditures
- Payments for business software or cloud computing service that facilitates business operations
- Accounting fees (Even Federal government believes we are important)
- Product or service delivery
- The processing, payment, or tracking of payroll expenses
- HR and billing functions
- Account or tracking of supplies, inventory, records, and expenses
Property Damage Costs
Costs incurred from vandalism, looting, or public disturbances that occurred during 2020 that were not previously covered by insurance or other compensation.
Worker Protection Expenditures
PPP funding now covers operating or capital expenditures that allow a business to comply with requirements or guidance issued by the CDC, HHS, OSHA, or any state or local government starting March 1, 2020 and ending on the date which the national emergency declared by the president expires.
Equipment and supplied that keep a business in compliance with standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 may be covered by PPP funding. These could include:
- PPE
- Physical barriers that were put in place
- Expansion of indoor/outdoor space
- Ventilation or filtration systems
- Drive-through windows
This inclusion made a lot of sense to me. Keeping your business open became a lot more expensive with the responsibility to project your employees. Having the ability to use the PPP funds to cover some of these costs seems like a no-brainer!
Crucial Tax Changes
Drum roll… Under the new legislation, forgiven PPP loans will be completely tax-free (at a federal level). Any business expenses paid for with PPP loans that would normally be tax-deductible will continue to be deductible.
Specifically, the updated language says, “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, because of the exclusion from gross income provided.” (Section 1106 of the Cares Act.)
This provision applies to loans under both the original PPP and subsequent PPP loans.
This is such a massive change and really is crucial to the continuing ability of businesses to operate. Under the previous rules a lot of businesses that made use of the first draw were under pressure of larger than normal tax bills because of the disallowed expense. They were staring down a massive cash outflow that might have stopped their recovery in its tracks.
We now wait on states to react after many made changes to be inline with federal legislation.
Forgiveness Update for EIDL Advance Recipients
First-time PPP borrowers that received an EIDL Advance had that amount subtracted from their total forgiveness. However, under the new provisions in this relief package, EIDL Advances will no longer reduce PPP loan forgiveness effectively making these two programs independent
The SBA has indicated that borrowers that already received forgiveness and had their EIDL Advance deducted from such forgiveness may be able to amend their forgiveness applications.
As mentioned earlier, borrowers must still use at least 60% of the PPP funding on payroll expenses over a covered period of between 8 and 24 weeks to receive total forgiveness. The other 40% can go towards the covered uses outlined above.
SBA issued a simplified forgiveness application in October for borrowers with loans of $50,000 or less. The new proposal simplifies the forgiveness application process for loans up to $150,000. (However, it also strengthens SBA’s ability to audit and review forgiven loans, with $50 million appropriated for that purpose.)
When will the new funds be available?
The SBA must establish and release regulations on the new PPP funding no later than 10 days, happened this week, after Congress signed the legislation. The program will reopen for applications on Monday January 11, 2021and will run through March 31, 2021 (or once funds have been fully allocated).
The SBA has released a new application form, it can be found here:
Get ready to move quickly
If COVID-19 impacted your business, it’s critical that you stay updated and if you are planning to apply should prepare to move as quickly as possible once applications are open.
Right now, reach out to your bank and let them know you intend on applying for the second round of funds. You may also want to look for other options than your bank, especially if it was a larger bank. In the first round of PPP, larger banks had such an influx of applications that they could not approve loans as quickly as smaller banks and fintech lenders. It is still unclear which wants will partake or if they are going to be ready. I know they will try their best but having additional options in place will not harm anyone.
Next, reach out to your trusted advisor. Working with a professional to help navigate the complexities of the new round of PPP will remove some of the stress from your life.
If you do not have a trusted advisor and need help, reach out to me. I would be more than happy to share what I know and provide any guidance you might need. You can reach me at [email protected] or through the Protea Financial website.