On December 27, 2020, President Trump enacted the latest COVID-19 relief plan, providing $ 900 billion in much needed assistance to individuals and businesses during the ongoing coronavirus pandemic. A crucial part of this overdue legislation is the amount of more than $ 284 billion allocated to a new round of funding for the Paycheck Protection Program (P3). This current P3 funding cycle runs through March 31, 2021 or until funding runs out. Critically, the legislation also avoids a government shutdown.
Of the more than $ 284 billion in additional financing allocated to the PPP, $ 35 billion is reserved for first-time borrowers, of which $ 15 billion will be reserved for smaller first-time borrowers with 10 employees or less, or for loans with fewer $ 250,000 in low- and middle-income neighborhoods. In addition, $ 25 billion of the new PPP funding will be earmarked for second-draw PPP loans for small borrowers with ten or fewer employees, or loans below $ 250,000 in low- and moderate-income communities. The US Small Business Administration (SBA) is authorized to adjust set-aside contracts if necessary 25 days after the legislation is enacted (which will be January 21, 2021, allowing the Biden administration to make that decision).
Small businesses in need of additional relief can begin to assess the revised Paycheck Protection Program rules and assess their eligibility to apply for additional P3 funding.
Notable Changes to the Paycheque Protection Program
The new legislation changes important elements of the PPP criteria. For example, the PPP provisions impose several restrictions on eligibility, including, with a few exceptions, the ban on listed companies, companies established in China or with significant operations in China, and entities primarily engaged in business. policies or lobbying to obtain PPP loans. The legislation also opens up the possibility that certain small businesses in bankruptcy proceedings, which were previously excluded, may now be able to obtain PPP loans subject to a decision by the SBA administrator and the approval of the SBA. court. Some housing cooperatives, media organizations and professional associations are also now eligible for PPP loans. A business must have been in business on February 15, 2020 to apply for a PPP loan.
The aid plan also allows small businesses and non-profit entities that have exhausted their first PPP loan to obtain a second PPP loan, a “second draw” loan. An entity is eligible for a second draw if it does not employ more than 300 employees and can demonstrate a reduction of at least 25% in gross revenue in the first, second, third or fourth quarter of 2020 compared to the same quarter in 2019. Borrowers can receive a second drawdown loan up to 2.5 times their average monthly salary costs, or for accommodation and food services industry entities assigned to NAICS code 72, loans up to 3, 5 times their average monthly wage costs. In either case, no loan can exceed $ 2 million, a substantial decrease from the $ 10 million limit for initial PPP loans.
A key change to the paycheck protection program is the expansion of expenses for which the P3 loan can be used. The CARES Act allowed borrowers who requested loan forgiveness to use the loan proceeds to maintain their payroll and cover other limited expenses such as mortgage, rental, and utility payments. The expanded program identifies other permitted uses of loan funds, including:
Covered operating expenses. Payment for any business software or cloud computing service that facilitates business operations; delivery of products or services; the processing, payment or tracking of payroll expenses, human resources, sales and invoicing functions; or accounting or tracking supplies, inventory, records and expenses.
Covered property damage costs. Costs related to property damage and vandalism or looting due to public unrest in 2020 that were not covered by insurance or other compensation.
Supplier costs covered. Expenditure incurred by an entity for the supply of goods essential to the operations of the entity at the time the expenditure is made and is made under a contract, order or purchase order in force at all times before the period covered with with respect to the applicable covered loan, or with respect to perishable goods, in force before or at any time during the period covered with respect to the applicable covered loan.
Covered expenses for worker protection. An operating or capital expense to facilitate the adaptation of an entity’s business activities to comply with established requirements or guidelines issued by HHS, CDC, OSHA or any equivalent established requirement or guidance issued by a state or local government during the period beginning March 1, 2020, and ending on the expiration date of the COVID-19 National Emergency Declaration. This may include expenses for personal protective equipment, physical barriers such as sneeze guards and a ventilation or filtration system inside, outside or in combination with air or pressure. ‘air.
Borrowers can use funds from previous PPP loans to cover expanded categories of expenses if their original loan has not yet been canceled.
Tax treatment of PPP loans
The law also clarifies the tax treatment of PPP loan forgiveness. It clarifies that gross income does not include any amount that would otherwise result from the cancellation of a PPP loan and that deductions are allowed for otherwise deductible expenses paid with the proceeds of a canceled PPP loan. This provision overrides the IRS’s current position, Notice 2020-32, which ruled that although the cancellation of the PPP loan would not generate taxable income, no deduction was allowed under Internal Revenue. Code for an expense that was otherwise deductible if payment of the expense resulted in forgiveness of a loan covered under the CARES Act. Many borrowers and tax practitioners have argued since the inception of the Paycheck Protection Program that it was congressional intent that business expenses paid with canceled P3 loans be tax deductible. Congress has now confirmed its position, essentially offering a double taxation benefit to borrowers.
The tax treatment is intended to apply to borrowers who will receive PPP loans in accordance with the additional legislation and to borrowers who received PPP loans under the original CARES law, including borrowers who have already requested a discount. loan.
The PPP continues to focus on the payroll, forcing borrowers to spend at least 60% of their loans on the payroll to receive full discount. The remaining 40% of the funds can be used on the expanded list of expenses not covered by the payroll. The period during which the expenses are taken into account for the cancellation of the loan will begin on the date of granting of the loan and will end on the date chosen by the borrower, that is to say between eight and 24 weeks after the granting of the loan.
The new law does not change the rule reducing the cancellation of PPP loans if the borrower has reduced the number of employees or the salaries of employees by more than 25% during the period covered. The back-up plan expands existing safety zones, giving PPP borrowers the ability to restore employee numbers and salaries on time so as not to suffer a reduction in the discount.
The relief program also creates a streamlined forgiveness process for loans of $ 150,000 or less. Recipients of these small loans will receive a discount if they sign and submit to the lender a short certificate, which includes a description of the number of employees the borrower has been able to retain thanks to the covered loan, the total estimated loan amount over the salary costs and the total loan amount. Borrowers must also attest that the borrower has accurately provided the required certification and complied with the requirements of the PPP loan. The SBA is required to create this simplified loan forgiveness certification form within 24 days of the promulgation date. Notably, the law specifically provides that the SBA cannot require a beneficiary of a loan of less than $ 150,000 to submit an application or documents beyond the short certification and information required to justify the requirements. loss of income at the time of the loan forgiveness request. Borrowers should, however, keep relevant records related to employment and compliance with applicable regulations, as a borrower may be required to submit documents to a lender or may subsequently be subject to an audit by the SBA. The legislation does not address additional loan cancellation documentation requirements to support borrowers’ underlying need for loans over $ 2 million that were the subject of a recent lawsuit. See Complaint, The Associated General Contractors of America, Inc. v. United States Small Business Administration, et al., n ° 1: 20-cv-03567 (DCCir. 8 December 2020).
The SBA only has until January 6, 2020 to establish implementing regulations to implement these new PPP arrangements.
© 2021 Faegre Drinker Biddle & Reath LLP. All rights reserved.Revue nationale de droit, volume X, number 364