The Consolidated Appropriations Act, 2021 (CAA), enacted Dec. 27, 2020, made a number of changes to the Paycheck Protection Program (PPP). The PPP originally was enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequently was amended under the Paycheck Protection Program Flexibility Act of 2020. Outlined here are some of the more significant CAA provisions related to the PPP.
Deductibility of expenses attributable to forgiveness
Effective for taxable years ending after March 27, 2020, the CAA amends the tax treatment of expenses attributable to PPP forgiveness. Specifically, in addition to the CARES Act exclusion from gross income for forgiven PPP amounts, the CCA provides that for such nontaxable amounts “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied.” The CAA also provides rules for partnerships and S corporations to treat such amounts as tax-exempt for purposes of IRC Sections 705 and 1366 and to treat any increase in the adjusted basis of a partner’s interest with respect to such amounts as equal to the partner’s distributive share of deductions related to costs giving rise to the forgiveness.
Immediately after the CAA’s enactment, the IRS issued a revenue ruling to override its prior guidance on this issue.
In addition to increased funds for the PPP, until March 31, 2021, eligible borrowers may apply for a second-draw PPP loan if the borrower employs no more than 300 employees, experienced at least a 25% reduction in gross receipts in a calendar quarter in 2020 compared to the same calendar quarter in 2019, and will use or has used the full amount of its first PPP for only authorized uses. Guidance requires a borrower to submit a forgiveness application for its first-draw loan no later than when applying for a second-draw loan that exceeds $150,000. Generally, the maximum second loan amount is $2 million, limited to a multiple of 2.5 of the average monthly payroll costs of the borrower during either 2019 or the 12 months before the date the loan is made.
For a business assigned a North American Industry Classification System code beginning with 72 at the time of loan disbursal, the employee threshold is increased to 500 per physical location, and the loan amount multiple is increased to 3.5.
Ineligible borrowers include (but aren’t limited to) business concerns and entities engaged in political or lobbying activities, those having certain connections with China or Hong Kong, and persons required to register under the Foreign Agents Registration Act of 1938.