Congress Takes Lead On PPP In New Stimulus Bill, Defying Treasury

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 were targeted to businesses and that included 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 be used for 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 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, is targeted to smaller and harder-hit businesses.

In order 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. Businesses with multiple locations that are eligible may employ not 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). And, applications submitted on or after January 1, 2021 are eligible to utilize the 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 (that includes, for example, nonprofits and religious organizations such as churches).

Also not eligible? In response to a great deal of 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-thru 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 date of enactment of the CARES Act (March 27, 2020).

This is true for 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 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 description of the number of employees the borrower was able to retain 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 the amount of 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 docked from PPP loans: that’s no longer the case as the section of the CARES Act is 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, disclosure is required 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.