Note: The implementation of COVID-19 relief programs is a fluid situation with new details released daily. We strive to keep this information as up-to-date as possible and will highlight important changes you should be aware of.
Based on the New Year Updates on PPP and EIDL Webinar presented by Randy Malueg, CPA
Updates as of 1/8/2020
PPP2 Loan Program
The new legislation will reopen the PPP loan program for the most severely impacted businesses. According to Section 311, second PPP loans (referred to as PPP2) are limited to businesses who meet the following guidelines:
- Fewer than 300 employees
- 25% reduction in gross receipts in any 2020 quarter compared to same quarter in 2019
- Have or will use full amount of PPP1 loan before the disbursement of the PPP2 loan
PPP2 Loan Program Eligibility
This program is available to small businesses with 300 or fewer employees that are eligible for other SBA 7(a) loans. This includes:
- Sole proprietors, independent contractors, and eligible self-employed individuals
- Not-for-profits, including churches
- Accomodation and food services operations (those with NAICS codes starting with 72) with fewer than 300 employees per physical location.
The bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them. The PPP2 loan also reduces the amount a borrower can receive from $10 million to $2 million, gives business more flexibility on how they spend the loan proceeds, and simplifies the forgiveness process for loans under $150,000.
The new act carves out $12 billion for minority-owned businesses and expands eligibility to more nonprofits and local newspapers and TV and radio broadcasters.
PPP2 Loan Program Specifics
Please review the PPP2 Application and contact your local bank to see if they are participating and can assist you in applying.
The PPP2 loan amounts are calculated using the average monthly payroll costs (AMPC) paid during 2019 or within the 12-month period before the origination of the PPP2 loan.
In general, PPP2 loans will be equal to the AMPC multiplied by 2.5, for a maximum loan amount of $2 million. Restaurants and Food Service companies can qualify for loans equal to 3.5 times AMPC. The bill provides for flexibility on the spending of funds and a simplified loan forgiveness process for loans under $150,000 (discussed further on).
The SBA has 10 days from the day the legislation is signed into law to establish regulation to PPP2 loans (January 13, 2021).
View the PPP2 loan application here.
Check with your local bank to see if they are participating in PPP2. Not all lenders will be accepting applications for PPP2, so it is encouraged to confirm with a lender before planning to apply.
PPP2 Loan Forgivable Costs
The following expanded definition of “Forgivable Costs” applies to PPP1 and PPP2 loans:
- Payroll, rent, covered secured loan interest, utilities, operating costs (including software, cloud computing, and accounting services);
- Covered operation expenditures (i.e. software and cloud computing services used for the business);
- Property damage, vandalism, and looting costs due to public disturbances that occurred during 2020 that are not covered by insurance;
- Essential supplier expenditures;
- Investment in facility modifications and PPE to comply with COVID-19 federal health and safety guidelines
PPP2 borrowers will have to spend at least 60% of the funds on payroll over a covered period of either 8 through 24 weeks in order to be eligible for loan forgiveness. These periods are the same parameters of PPP1 when it stopped accepting applications in August 2020.
PPP Tax Treatments
COVIDTRA clarifies that taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses that were paid with the proceeds of a PPP loan. This provision is effective as of the date of enactment of the CARES Act (March 27, 2020). The tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. No amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness.
The provision provides similar treatment for PPP2 loans, effective for tax years ending after the date of enactment of the provision.
As a result of PPP1 or PPP2 loan forgiveness, no deduction shall be denied, no tax attributes shall be reduced, and no basis increase shall be denied. In the case of an eligible recipient that is a partnership or S corporation, any amount excluded from income is treated as tax exempt income for purposes of Section 705 (provision for partnerships) and Section 1366 ( provisions for S corporations). Any increase in the adjusted basis of a partner’s interest in a partnership under Section 705 shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.
Simplified Forgiveness Application for Covered Loans up to $150,000
The new legislation has created a simplified forgiveness application process for loans of $150,000 or less. This application can be found here.
A borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that includes the following guidelines:
- Not more than one page in length
- Description of the number of employees the borrower was able to retain because of the loan
- The estimated total amount of the loans spent on payroll costs
- The total loan amount
The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements.
An eligible recipient of a covered loan that is not more than $150,000 shall not, at the time of the application for forgiveness, be required to submit any application or documentation in addition to the certificate and information required to substantiate forgiveness. Nothing shall be construed to exempt an eligible recipient from having to provide documentation independently to a lender to satisfy relevant federal, state, local, or other statutory or regulatory requirements, or in connection with an audit.
Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
PPP Full Time Equivalence (FTE)
Existing safe harbors on restoring FTE and wage reductions in excess of 25% are extended. These restorations must occur by the last day of the PPP2 loan covered period. Requirement for employees earning $100,000 during the applicable period refers to a prorated annualized basis during the period it was paid.
EIDL Loans and Advances
The EIDL emergency grant is no longer available. The new legislation repealed the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.
Eligibility for target EIDL advances:
- Located in a low-income community
- Experienced a 30% decline in revenue over an 8-week period in 2020 as compared to the same period in 2019
- Those who qualified for a Section 7(b)(2) Small Business Act Loan under the CARES Act Section 1110(b) are eligible to receive a grant:
- Equal to what the entity received under the CARES Act and $10,000
- For the full $10,000 if the applicant did not receive a grant because the funding ran out
Extension of Credits for Paid Sick and Family Leave
The provision extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act (FFCRA), through the end of March 2021 (which previously expired December 31, 2020). This also modifies the tax credits so that they apply as if the corresponding employer mandates were extended through the end of March 2021. This provision is effective as if included in FFCRA.
Election to use prior-year net earnings from self-employment in determining average daily and self-employment income for purposes of credit for paid sick and family leave.
The act allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit. This provision is effective as if included in FFCRA. Form 7202 is still and draft.
Extension of Employee Retention Credit
Effective January 1, 2021 – June 30, 2021
- Increases credit rate of qualified wages from 50% to 70%
- Reduces year-over-year gross receipts decline from 50% to 20% and allows use of prior quarter to determine eligibility
- Increases limit on employees wages from $10,000 per year to $10,000 per quarter
- Increases 100 employee delineations for determining qualified wage base to 500 or fewer employees
- Now includes bonuses to essential workers
Employee Retention Credit (ERC)
Gross receipts must have declined at 20% from the same quarter in 2019. Employers who were not in business in 2019 qualify if revenue for the current calendar quarter declined 20% or more as compared to the same quarter in 2020.
- Alternate Gross Receipt Test: For 2021, employers can elect to look at the immediately preceding calendar quarter and compare that quarter to the corresponding quarter in 2019.13 (Section 207)
Under the modified rule, employers can claim the employee retention credit on any eligible wages not used to support PPP loan forgiveness and any wages that could count toward both provisions can be applied to either, but not both, at the election of the employer. In order to do so, employers must have 500 or fewer employees. The refund amount cannot exceed 70% of average quarterly wages paid in 2019.
If you are not currently a Michigan SBDC client, but have questions pertaining to your small business’ specific situation please fill out a request for consulting, or see if your question has been answered on our PPP2 FAQ page.