Congress Includes Paycheck Protection Program Provisions in Stimulus Bill

(Author’s Note: The bill passed in the House and Senate on December 21, 2020, after this piece originally appeared.)

When Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020, the law included provisions intended to help businesses. One of the most popular is known as the Paycheck Protection Program, or PPP.

The program is precisely what it sounds like: billions in (potentially) forgivable loans to keep workers on the payroll. The loans targeted businesses, including sole proprietorships, independent contractors, gig-economy workers, and self-employed individuals. Businesses could use the money for employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. Funds could also cover family, medical, and sick leave.

The money went quickly: the program opened on April 3, 2020, and closed on April 16, 2020. An additional $310 billion was approved for a second round of PPP funding shortly after; that program closed on August 8, 2020. In total, the PPP resulted in over five million loans totaling $525 billion. According to SBA data, about a quarter of all loans were $150,000 or less.

As of today, the SBA is no longer accepting PPP applications from participating lenders. But that is changing: the latest stimulus bill from Congress, which passed on December 21, 2020, includes some significant updates, including new funding.

Here’s a look at what you need to know:

PPP Second Draw

The bill would expand the PPP program to allow some businesses to receive an additional loan. The second loan, called a “PPP second draw” loan, targets smaller and harder-hit businesses.

To receive a second draw PPP loan, eligible entities must employ 300 or fewer employees and have used or will use the full amount of their first PPP loan. Eligible businesses with multiple locations may employ no more than 300 employees per physical location.

Businesses must demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Businesses that aren’t in business for all quarters must demonstrate appropriate reductions during the months they were in business (for example, they can compare earlier 2020 quarters rather than compare to 2019). Applications submitted on or after January 1, 2021 are eligible to use gross receipts from the fourth quarter of 2020.

A business that was not in operation on February 15, 2020, is not eligible for an initial PPP loan and a second draw PPP loan.

Eligible & Ineligible Entities

Eligible entities must be businesses, as before, and also include certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Ineligible entities include those listed in 13 C.F.R. 120.110 (those typically not eligible for SBA business loans), unless otherwise made eligible by statute or guidance (including, for example, nonprofits and religious organizations such as churches).

Also not eligible? In response to significant outcry, public companies may not apply. Additionally, any entity “primarily engaged” in political or lobbying activities, including those organized for research or advocacy in areas such as public policy or political strategy (an entity that describes itself as a think tank in any public documents is a clear red flag), cannot apply. And in a nod to politics, any entity affiliated with businesses in China, and any registrants under the Foreign Agents Registration Act, are barred from participation, as well as any entity that receives a grant under the Shuttered Venue Operator Grant program.

Some specific exceptions and waivers apply, including some expanded provisions for first-time borrowers.

The bill also clarifies that some EIDL borrowers may also apply for a PPP loan.

Borrowing

Generally, businesses can borrow up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year. Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times their average monthly payroll costs.

Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020. A seasonal employer is one who operates for no more than seven months in a year, or earned no more than 1/3 of its receipts in any six months in the prior calendar year.

Tax Provisions

The bill also makes clear that PPP forgiveness is not taxable (it’s excluded from income).

In the case of a partnership or S corporation, any amount excluded from income is treated as tax-exempt income for purposes of sections 705 (determination of basis of partner’s interest) and 1366 (pass-through of items to shareholders). Any resulting increase in the adjusted basis of a partner’s interest in a partnership under section 705 is equal to the partner’s distributive share of deductions resulting from those expenses.

And despite significant push-back from Treasury and in the face of IRS guidance to the contrary (Rev Rul 2020-27), Congress did include deductibility in the bill. Deductions are allowable for expenses paid with the proceeds of a forgiven PPP loan (as before, tax basis and other attributes of the borrower’s assets will not be reduced). That’s retroactive to the date of enactment of the CARES Act (March 27, 2020).

This applies to first- and second-draw PPP loans.

Forgiveness

Under the bill, borrowers can choose a covered period of between 8 and 24 weeks (that’s the time period to spend funds on qualified expenses for purposes of forgiveness). The definition of qualified expenses has expanded, too, to more closely mirror what was offered in earlier versions of the stimulus bills, including the skinny bill. Those expenses include software, cloud computing, human resources, payroll, billing and accounting, costs related to “property damage and vandalism or looting due to public disturbances” that occurred during 2020 and were not covered by insurance, supplier costs, and worker protection related to social distancing, sanitation, or other safety requirements.

The bill also creates a simplified forgiveness application (”not more than one page in length”) for loans up to $150,000. The application will require a description of how many employees the borrower retained because of the covered loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. And of course, borrowers will have to attest that they provided the right documents and complied with the loan requirements.

The bill also repeals the requirement that borrowers deduct any EIDL advance from their PPP forgiveness amount.

Clean Up

And remember those EIDL loans? Under the CARES Act, $10,000 of those loans was treated as an advance (also called a grant) that didn’t have to be repaid. But the law also required those funds to be deducted from PPP loans; that’s no longer the case because the section of the CARES Act has been repealed.

Disclosures

And in a nod to public concerns about PPP forgiveness, if the President, Vice President, the head of an Executive department, or a Member of Congress (or their spouses) receives a PPP loan, they must disclose it within 30 days of forgiveness. Those folks are also barred from receiving a loan in the future.

More Info About Stimulus

The PPP is just a piece of the larger stimulus bill. You can read my summary of the stimulus bill here.