Legislation expands Paycheck Protection Program

| 1/28/2021
Legislation expands Paycheck Protection Program

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. 

Second-draw loans

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.

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Expanded eligibility for first-draw (and second-draw) loans

Among the organizations made newly eligible for the PPP are certain news organizations, IRC Section 501(c)(6) organizations, and governmental destination marketing organizations. 

Generally, an eligible tax-exempt IRC Section 501(c)(6) organization cannot include a professional sports league or organization with the purpose of promoting or participating in a political campaign or other activity, and it cannot:

  • Employ more than 300 employees
  • Receive more than 15% of its receipts from lobbying activities
  • Have lobbying activities constitute more than 15% of its total activities
  • Exceed $1 million in lobbying activities’ costs during the most recent tax year of the organization that ended before Feb. 15, 2020 

Expansion of permitted nonpayroll costs

For any PPP loan not forgiven as of Dec. 27, 2020, the CAA expands permissible nonpayroll costs to include:

  • Covered operations expenditures. Defined as payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions, or accounting or tracking of supplies, inventory, records and expenses
  • Covered property damage costs. Defined as costs not covered by insurance or other compensation related to property damage and vandalism or looting due to public disturbances that occurred during 2020
  • Covered supplier costs. Defined as an entity’s expenditures made to a supplier for the supply of goods that are essential to the entity’s operations at the time the expenditure is made, provided such expenditure was made pursuant to a contract, order, or purchase order in effect at any time before the loan’s covered period or, with respect to perishable goods, in effect before or at any time during the loan’s covered period
  • Covered worker protection expenditures. Defined as operating or capital expenditures to facilitate adapting an entity’s business activities to comply with requirements or guidance issued by the Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration (or any equivalent requirements or guidance issued by a state or local government) between March 1, 2020, and the date the COVID-19 national emergency declared by the president expires, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19

Interaction with CARES Act employee retention payroll tax credit

Under the CARES Act, an eligible employer may apply an elective refundable and advanceable employee retention payroll tax credit (ERC) against the employer’s 6.2% Social Security tax otherwise required to be paid during certain periods in 2020. When the CARES Act established the ERC along with the PPP, it prohibited a taxpayer from electing the ERC if any member of its aggregated group received a PPP loan. 

The CAA amends this prohibition retroactively to enactment of the CARES Act to permit eligibility for the credit if a taxpayer has received a PPP loan – subject to certain rules to prevent double benefits as well as abuse with respect to moving employees. The CAA also extends and prospectively expands the ERC until June 30, 2021. Read details on CAA amendments to the ERC.

Next steps

The Small Business Administration reopened the PPP on Jan. 11 for first-draw loans and on Jan. 13 for second-draw loans. Employers that received first-draw PPP loans should consider eligibility for a second-draw loan, and those newly eligible for a PPP loan should consider applying for a first-draw loan.

Now that all borrowers might be able to obtain both loan forgiveness and ERC payroll tax credits – for 2020 and also under new ERC rules for the first two quarters of 2021 – they should consult their tax advisers to determine eligibility for the ERC and how to maximize benefits. Look for joint guidance from the U.S. Department of the Treasury and the Small Business Administration on the interactions between these two forms of relief.

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Veena Murthy
Veena Murthy
Principal, Washington National Tax