Consolidated Appropriations Act Brings Change to the PPP
Article

Consolidated Appropriations Act Brings Change to the PPP

by Tabatha McCord
March 01, 2021

The Consolidated Appropriations Act (CAA) was signed by President Trump on December 27, 2020 — nine months after the first COVID-19 relief package (the CARES Act) was enacted. Included in this long-awaited second relief package is $284 billion of new funding for small business loans under the Paycheck Protection Program (PPP), which will be available until March 31, 2021.

Several changes were made to the PPP program under the CAA, and many of these changes depend on whether or not a business previously received a PPP loan. Here are the current rules.

First Draw Loans

Businesses requesting their first PPP loan (i.e., they have not previously received a PPP loan) determine their eligibility and calculate the maximum loan amount available in the same manner as those businesses that applied for a first round loan under the CARES Act funding last year:

Eligibility
  • Must have been in business prior to February 15, 2020 (or be a seasonal business that operated for a 12-week period between February 15, 2019, and February 15, 2020)
  • Must have fewer than 500 employees (after considering affiliation rules)
Amount

Maximum loan amount is the lesser of 2.5 x average monthly payroll based on 2019 gross wages (capped at $100,000 annual salary per employee) plus employer-paid health benefits, employer-paid retirement benefits, payment of state or local tax assessed on the compensation of employees, or $10,000,000. In addition, borrowers that initially returned all or part of their original PPP loan may reapply for an amount equal to the difference between the amount retained and the maximum eligible amount.

Second Draw Loans

If a business previously received a PPP loan, the following criteria apply in determining if the business is eligible for a second loan and the maximum loan amount available:

Eligibility
  • Have or will use the full amount of the first draw PPP loan for eligible expenses
  • Must be able to demonstrate a reduction in gross receipts of 25% or more for at least one quarter of 2020 compared to the same quarter in 2019 (alternative comparisons are available for those who were not in business for one or more quarters during 2019 and for those not in business at any time during 2019, but who were in operation as of February 15, 2020)
  • Must have fewer than 300 employees (after considering affiliation rules)
Amount
  • The maximum loan amount is the lesser of 2.5 x average monthly payroll based on 2019 or 2020 gross wages (capped at $100,000 annual salary per employee) plus employer-paid health benefits, employer-paid retirement benefits, payment of state or local tax assessed on the compensation of employees, or $2,000,000. For many borrowers, this will be the same amount as their first draw PPP loan since they are using the same payroll costs.
  • For those classified as “accommodation and food services” businesses, the maximum loan amount is the lesser of 3.5 x average monthly payroll (capped at $100,000 annual salary per employee) or $2,000,000. To demonstrate this classification, the business must use the six-digit NAICS business code on their IRS income tax filing, which should begin with “72”. For purposes of applying affiliation rules, NAICS code 72 businesses are eligible to apply for a loan for each location that is a separate legal business entity and employs fewer than 300 employees.
Loan Forgiveness

The CARES Act ensured PPP loans which are subsequently forgiven are not taxable, and the CAA specified that the expenses paid with PPP funds are deductible. This effectively overturned the IRS ruling that the expenses were not deductible. This is a huge win for taxpayers who would otherwise pay tax on this debt forgiveness and reinforces the intent of Congress to help businesses keep Americans employed.

For both first and second draw PPP loans, if during the 8- to 24-week covered period after the loan proceeds are received, the borrower generally meets the following criteria, the loan may qualify for full forgiveness:

  1. All loan proceeds are used for payroll costs and other eligible expenses (which have been expanded by the CAA).
  2. At least 60% of the proceeds are used for payroll costs. The remaining 40% may be used for mortgage interest, rent, utilities, and other covered expenses (the CAA expanded these expenses to include operation expenditures, property damage, supplier costs, and worker protection expenditures).
  3. Employee count (measured by full-time equivalents) and compensation levels are maintained in general.

There are various safe harbors and borrowers need to perform the calculations, but for those loans (or portions of loans) that do not qualify for forgiveness, you can’t beat the loan terms: 1% non-compounding interest with a two-year maturity for loans issued on or before June 5, 2020, and a five-year maturity for those loans issued after June 5, 2020.

Other Considerations

Federal taxation and eligible expenses paid with PPP loan proceeds – As noted above, the CAA overruled the IRS’s previous position to allow businesses to deduct eligible expenses included in PPP forgiveness.

State taxation and PPP loan forgiveness - Each state has the authority to determine if they will follow federal law in excluding loans forgiven under the PPP for income and/or franchise tax purposes and whether or not the expenses will be tax deductible (see our state-by-state table). Many states have yet to make these decisions, as state conformity to federal law varies by state.

Under current law in Texas, for instance, unless a specific exception is met, the forgiven PPP loan will be subject to Texas franchise tax. California, on the other hand, passed a law in September 2020 to state definitively that forgiven PPP loans will not be subject to taxation and later passed legislation making the expenses paid with loan forgiveness proceeds deductible up to $150,000. (States continue to pass legislation, so make sure you confirm the current conformity and any proposed state legislation.)

Employee Retention Credit and PPP loan forgiveness – The Employee Retention Credit (ERC) program allows employers to receive a dollar-for-dollar credit against employment tax for up to $5,000 per eligible employee in 2020 and up to $7,000 per eligible employee per quarter in 2021. The program has been very popular, as the credit is refundable (meaning an employer can get a refund if the credit exceeds the employer’s 6.2% share of Social Security tax) and it can be applied for in advance of quarterly payroll filings, providing instant cash relief. The CAA made it possible for a business to claim an ERC and receive a PPP loan (under the CARES Act, a business could apply for a PPP loan or the Employee Retention Credit – but not both).

However, the wages used to calculate an ERC and those used in calculating PPP forgiveness cannot overlap (no double dipping allowed). Further, the CAA also indicates wages for purposes of calculating an ERC take precedence over wages for PPP loan forgiveness.

If you have questions or need assistance, reach out to our PPP experts.

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Author
Tabatha McCord - Tax | Armanino
Senior Manager
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