Congress is currently working a stimulus package including potential economic relief items; extension of unemployment benefits, stimulus checks to some households, assistance to live entertainment venues and funding for additional Payroll Protection Plan loans. The following is summary of the draft legislation related to additional Paycheck Protection Program loan availability and is subject to change. Small businesses that continue to experience economic hardships due to the COVID-19 pandemic should be prepared to apply for additional government assistance, if needed.
What entities are eligible for Payroll Protection Plan loans in this draft package?
Under draft legislation, the types of entities eligible will be similar to the PPP program from earlier this year with some expansion. Trade associations organized under the 501( c) (6) section of the IRC may be eligible to apply for PPP loans. There may be certain restrictions on associations that participate in lobbying activities. In the draft legislation there is also a set aside of certain funds for organizations that did not receive PPP funds in the first round of funds. Although this may help trade associations receive funding, we learned from the initial round of funding that these funds can be depleted extremely fast. Therefore 501( c)(6) organizations that are in need of these funds should begin gathering their data now to apply for this potential round of funding. These restrictions are being negotiated as a part of the final stimulus package and when the details are known we will provide additional details.
Entities eligible for this round of PPP funding may also be required to have less than 300 employees under the draft legislation.
Are there additional requirement for need for these PPP loans?
There was substantial backlash in the initial funding of PPP loans related to certain publicly traded and celebrity businesses that received these loans. The additional PPP funding provided in this legislation may require businesses to substantiate a reduction in gross receipts of 25-35% in any calendar quarter for 2020. The terms of the amount of reduction are a negotiation topic and many be lower than the percentage currently being discussed. The calculation of gross receipts will likely not include funds received from EIDL grants or PPP proceeds. A self-certification of need may be accepted for certain levels of loans. But even if self-certification is an option, borrowers will still be subject to potential subsequent SBA inspection to verify need.
What amount can eligible borrowers receive?
Eligible borrowers will likely be able to use the same criteria as the first round of PPP loans, which is two and half month of the average payroll for either 2019 or, a new option in this round, the previous twelve months. Borrowers that did not previously apply for PPP loans or would prefer to use payroll from the previous twelve months should begin gathering payroll data now in anticipation of this program’s start.
Will the PPP loans be forgivable?
Yes, the program is drafted to continue to provide forgivable loans to borrowers. But unlike the previous loans there will likely be additional expense categories eligible for forgiveness such as Personal Protection Equipment for employees, cleaning supplies and retrofitting costs for protecting employees in the workspace. The allocation of forgivable costs will likely have the requirement that 60% of forgivable costs be spent on payroll and the covered period will be borrower elected at either 8 or 24 weeks, both items similar to the current PPP program.
There is language in the draft legislation that would substantially simplify the forgiveness application documentation that borrowers are required to submit to their lender. The draft legislation also expands the simplified forgiveness application for loans less than $150,000. We believe that, if the legislation is signed into law, PPP loans in both rounds of funding under $150,000 may be able to complete a simple form self-certifying that the loan proceeds were used appropriately to obtain full forgiveness.
When will applications open for these additional PPP loans?
If this stimulus legislation is signed by the President, the Treasury will have to release new forms for applying for this PPP Program. There is a chance that PPP forms could be released by December 31, but more likely that the funding will open in early January 2021. Again, these projections are dependent on legislation being passed by Congress and signed by the President.
Does a previous PPP loan need to be forgiven or approved before receiving PPP loans through this stimulus package?
The draft legislation does not indicate that a forgiveness application must be submitted or approved prior to applying or receiving additional PPP funds.
What are the tax implications of this legislation?
The draft stimulus legislation includes language that would allow for PPP loan recipients to deduct expense used for forgiveness in both the initial PPP loan program and the additional PPP funds that may be made available. This portion of the legislation is being contested by the Treasury Secretary, but there is bi-partisan support in Congress to allow business to deduct expenses used under the PPP program. The AICPA, along with hundreds of other trade associations, authored a letter to Congress noting “Many PPP loan recipients retained employees on their payrolls, even when there was little to no work to perform, in compliance with the intent of the program to keep people employed and off the unemployment rolls.”
What can be done now?
Begin gathering data now. Do not wait until legislation is passed. Gather support for reduction in gross receipts. Review previously submitted PPP loan application payroll support and compare this to the previous twelve months payroll. These two options will, most likely, also be used for the next round of PPP loan applications. Watch for additional updates from us as this legislation makes it way through Congress and to the President for signature.