January 6th SBA Regulations Help Solidify PPP And EIDL Changes

 January 6th SBA Regulations Help Solidify PPP And EIDL Changes

This post was originally published on this site

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A note to readers: The main concept of this article was originally published on December 19th, before the ultimate version of this Act was finalized, voted on, and enacted. Now that this Act has been signed into law and we’ve received further guidance from the SBA, I wanted to publish this updated variation to ensure accuracy.

A big thank you to Brandon L. Ketron, J.D., LL.M., CPA, and Ph.D.in PPP, as well as Stetson Law students Patrick Collins, Ian MacLean, and Alex Sorley for their help in the research required to prepare this article.

Brandon Ketron CPA, J.D. LL.M. and I will give a 30 minute webinar outlining the current state of PPP on Saturday, January 9th at 10 AM EST. Email the subject line “Round 2” to info@gassmanpa.com to receive an invite.

Hats Off To The SBA

Much to the credit of the Small Business Administration, 118 pages of well-drafted, perfectly spell checked and grammar checked regulations were released early this morning. The new regulations clarify and supplement the Economic Aid Act, which is apparently the shorthand name the SBA has chosen to use for the Supplemental Appropriations Act of 2021.

These regulations provide some grout between the delicate tiles that all advisors are walking on in trying to best position our clients, friends, families, and others to receive the funding they so desperately need.

While these new regulations answer many questions, they also bring many new questions to mind and we hope that additional guidance will be coming in the very near future.

The turnaround time for these regulations is truly remarkable considering the pace that the SBA has worked at on these regulations in the past. This leads us to believe that these rules have been in the works ever since the Rubio-Collins bill was proposed back in July.

The SBA is planning to issue a comprehensive set of interim final rules that would cover all aspects of loan forgiveness and the loan review process under one document.

It will be interesting to see how the SBA is altered in substance and tone under the Biden Administration and whether additional aid will find its way into the hands of those businesses and individuals who need it the most.

The Big Items That Were Addressed

Some of the primary revelations from the SBA’s recent guidance release that you will want to pay attention to as you view this article are as follows:

  • New methods to calculate a 25% reduction in gross receipts
  • Clarifications regarding eligibility for second draw PPP loans
  • Denial of loan eligibility for those in bankruptcy
  • Borrowers can amend their initial loan application if they are eligible to receive more because of rule changes, but not if they simply miscalculated the loan amount they were eligible for.
  • The Interim Final Rules do not affect forgiven loans unless specifically stated otherwise
  • IRS Revenue Ruling 2021-02 clarifies tax treatment of PPP loans
  • No new guidance on the Employee Retention Tax Credit
  • No new guidance on Shuttered Venue Grants

For the convenience of the reader we have underlined the specific additions made to this subject as a result of Interim Final Rules released by the SBA on January 6th, 2020.

Let’s dive in and discuss what we know from the new Act so far and what we learned from the SBA’s Interim Final Rules released on January 6th, 2020:

Eligible Entities Have a Second Chance to Receive a PPP Loan

Many borrowers have requested a second round of PPP loans, and many potential borrowers who were unable to receive a PPP loan during the first round are hungry for their bite of the apple. The Act now reopens the program for new and old borrowers alike provided they meet the requirements of an “eligible entity.”

An “eligible entity” will need to satisfy the “Necessity Test” that is discussed in my blog post dated May 4, 2020 “Was Your PPP Loan ‘Necessary’? If Not, There Could Be Horrific Repercussions” as of the time of applying for this new second loan. This test, which is based upon whether the loan is “necessary to support the on-going operations of the applicant” will be hard to meet by businesses that have survived one or two hard quarters but are now making ends meet while waiting for a return to normality. The test will clearly not be passed by a high percentage of PPP borrowers who will otherwise qualify, and will present a very important issue to be carefully addressed with the borrower’s CPA, financial, and legal advisors. Since the summer of 2020 the SBA has maintained that it will not question the necessity certification of borrowers who have aggregate loans not exceeding $2 million. However, other agencies such as the IRS, or even whistleblowers, may question businesses’ certifications, and the fact that a second loan has been received will not be kept confidential.

The SBA’s Interim Final Rule released on January 6th reinforced their stance that the necessity certification for a borrower’s loan would not be questioned for either the first or second round of loans, provided the amount of each loan was less than $150,000.

Something For Everyone? – Not Quite

Assuming that the necessity test will be met, the next question is whether the PPP borrower is an “eligible entity”, which the Act and Interim Final Rules define as a business, independent contractor, eligible self-employed individual, sole proprietor, nonprofit organization eligible for a First Draw PPP Loan, veteran’s organization, Tribal business concern, housing cooperative, small agricultural cooperative, eligible 501(c)(6) organization or eligible nonprofit news organization that meets the following requirements:

The borrower must demonstrate that they suffered a 25% reduction in gross receipts during one quarter in calendar year 2020 when compared to the corresponding quarter in calendar year 2019. For the purposes of this 25% rule, gross receipts will include all revenues from the normal operation of the business before subtraction of expenses but will not include amounts borrowed, including amounts received and forgiven for PPP loans.

  • The January 6th Interim Final Rules further provided that borrowers who were in operation for all 4 quarters in 2019 may compare their calendar year 2019 gross receipts to calendar year 2020 gross receipts in order to determine if they satisfy the 25% reduction test. This addition won’t help anyone in any substantive way except to make documentation of such a reduction easier for borrowers. After all, it would be mathematically impossible for a borrower who experienced a 25% reduction in gross receipts for any quarter from one year to the next to not also suffer a 25% reduction year over year.

The borrower must certify that they have already used or will use the full amount of any PPP loan previously received.

  • The January 6th Interim Final Rules confirmed that a borrower applying for a second draw loan must certify that, before the Second Draw Loan is disbursed (but not necessarily at the time of application), they will have used the full loan amount (including any increase) of the First Draw Paycheck Protection Program Loan only for eligible expenses.

The borrower must employ no more than 300 employees, or 500 for a business with multiple physical locations.

  • The January 6th Interim Final Rules further clarified that North American Industry Classification System (“NAICS”) Code 72 entities (food service providers) and eligible news organizations with more than one physical location may have up to 500 employees.

For purposes of the above 25% reduction in gross receipts test, borrowers who were not in business during the first, second, or third quarter of 2019 (January 1 – September 30), but were in business during the fourth quarter of 2019 (October 1 – December 31), can compare the first, second, or third quarter of 2020 (January 1 – September 30) to the fourth quarter of 2019.

If the entity was not in business during 2019 but was in business by February 15, 2020, then the borrower can compare their gross receipts during the second or third quarter of 2020 (April 1 – June 30) to the first quarter of 2020 (January 1 – March 30) to see if they qualify.

You Snoozed You Loozed

For the sake of clarity, in order to qualify for a second draw PPP loan, a borrower must have received a PPP loan during the first round. The first loan window closed on August 8th, 2020, so if you did not apply for a loan prior to that date then you will not be eligible to receive a second draw loan. Borrowers seeking their first PPP loan will be eligible based upon the requirements previously set forth by the CARES Act and restated in the January 6th Interim Final Rules.

Larger Loan Amounts For Restaurants, Hotels, Motels, Bars, RV Parks, And Other NAICS Code 72 Entities.

For North American Industry Classification System Code 72 entities, which are comprised mostly of food service providers such as restaurants, hotels, and vendors, the maximum amount of new PPP loans is based upon the average monthly payroll costs from calendar year 2019 or any consecutive 12 month span prior to the date of application multiplied by 3.5, but not exceeding $2 million. This makes these entities eligible to receive approximately 40% more than any other entity applying for second draw loans because all other borrowers are required to multiply their applicable payroll costs by 2.5.

The table below lists each type NAICS Code 72 entity and their exact code designation. Theses codes will be required on second draw loan application for these entities.

Chart

Gassman, Crotty & Denicolo, P.A.

Regarding seasonal employers and NAICS Code 72 entities, the January 6th Interim Final Rules recognized the fact that there may be some overlap in these industries and clarified that a business that qualifies as both a seasonal employer and an NAICS Code 72 entity may calculate their payroll costs used to determine their loan amount based upon either the seasonal employer payroll costs formula, or the standard formula used to calculate payroll costs for every other type of borrower, while still being allowed to utilize the 3.5 times multiplier that is applied to NAICS Code 72 entities under the new Act.

Loan Amounts For Seasonal Employers, New Entities, And Entities With More Than One Physical Location

For seasonal employers, the maximum amount of new PPP loans is based upon the average monthly payroll costs for a 12 week period selected by the borrower that begins February 15, 2019 or March 1, 2019 and ends June 30, 2019. Alternatively, the borrower may elect to use any consecutive 12 week (any 96 consecutive days) period beginning after February 14, 2020 and ending before January 1, 2021) multiplied by 2.5, but not exceeding $2 million.

For new entities, the maximum amount of new PPP loans is based upon the average monthly payroll costs up through the date when the entity applies multiplied by 2.5, but not exceeding $2 million.

For eligible businesses with more than one physical location, the maximum amount of new PPP loans is stated as follows:

  • (I) the total amount of all covered loans shall be not more than $2,000,000; and
  • (II) in applying this paragraph, the Administrator shall substitute ‘not more than 300 employees per physical location’ for the term ‘not more than 500 employees per physical location’ in paragraph (36)(D)(iii).

Additional Expense Categories Eligible For Forgiveness:

The Act expands on the list of forgivable expenses to now include the following:

  1. Covered operations expenditures defined as “a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.”
  2. Covered property damage cost defined as “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”
  3. Covered supplier cost defined as “an expenditure made by an entity to a supplier of goods for the supply of goods that (1) are essential to the operations of the entity at the time at which the expenditure is made; and (2) is made pursuant to a contract, order, or purchase order in effect at any time before the covered period with respect to the applicable covered loan, or with respect to perishable goods in effect before or at any time during the covered period with respect to the applicable covered loan.”
  4. Covered worker protection expenditure defined as means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

The Act includes specific examples of what may be included as a Covered Worker Protection Expenditure as well as examples of items that do not qualify for such expense.

These expense categories will be forgivable as part of the “40%” expenses, or non-payroll costs, which are not included in the “60% rule” that requires that 60% of the loan proceeds be spent on “payroll costs”.

Expanded Definition of Payroll Costs

The Act adds on to the expense items included in the definition of “payroll costs”. Many borrowers will recall that, in order to gain full forgiveness, a borrower must expend 60% of their PPP loan proceeds on eligible payroll costs which, under the CARES Act, included the following: wages, payroll taxes, paid leave, healthcare payments, and retirement plan contributions.

This new Act, however, adds the following categories into the mix of forgivable payroll costs: Group life insurance, group disability insurance, group vision insurance, and group dental insurance.

The addition of these new expenses applies retroactively to any PPP loans, so some borrowers may be eligible to amend the loan application in order to receive a larger loan.

The chart below provides a detailed look at who eligible payroll expenses may be applied to:

Chart

Gassman, Crotty & Denicolo, P.A.

NOTE – Forgiveness is not provided for employer contributions for retirement benefits or health insurance accelerated from periods outside the Covered Period, and cannot include any retirement contributions or health insurance costs deducted from employees’ pay or otherwise paid by employees.

*Owner is defined as 5% or more shareholder in an S-Corporation or C-Corporation. No threshold provided for partners in a partnership.

Ownership By Chinese Entities And Politicians

Publicly traded businesses and entities that are owned 20% or more by entities or citizens of the People’s Republic of China are on the list of entities that cannot qualify for a new PPP loan. The Act is stated as follows:

(AA) for which an entity created in or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or that has significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership; or

(BB) that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China

It is of note that the People’s Republic of China is the only restricted country included in the new Act, not North Korea, Iran, Russia, or other adversarial nations.

Interestingly, the January 6th Interim Final Rules included an additional prohibition that was not clearly stated in the new Act. Entities in which The President, the Vice President, the head of an Executive department, a Member of Congress, or the spouse of any such individuals have a controlling interest will not be eligible to receive any PPP loans.

Concerned readers should note that this rule will not apply to Hunter or any of the other Biden children unless they marry one of these prohibited individuals – nor will it apply to President Trump or his family assuming he will no longer be president 13 days from the date of this article’s publication.

Additional Loans Cannot Exceed $2,000,000 per Borrower–90 Day Wait Between Loans

The loan amounts for a vast majority of borrowers will be almost identical to what the borrower received for their original PPP loan. This second round of funding, however, is capped at $2 million per borrower rather than $10 million under the initial round under the CARES Act. For borrowers who received a PPP loan within the last 90 days, the law now requires that the aggregate of the new and old loan not exceed $10 million.

No Enforcement Action Against Banks

The Act provides that lenders are generally held harmless, and there will be no “enforcement action” with respect to lenders. The law now states as follows:

(2) NO ENFORCEMENT ACTION.—With respect to a lender that relies on the certifications and documentation described in paragraph (1) relating to a covered loan—

(A) no enforcement or other action may be taken against the lender relating to loan origination, forgiveness, or guarantee of the covered loan based on such reliance, including claims under—

(i) the Small Business Act (15 U.S.C. 631 et seq.);

(ii) sections 3729 through 3733 of title 31, United States Code (commonly known as the ‘False Claims Act’);

(iii) the Financial Institutions Reform, Recovery, and Enforcement Act (Public Law 101–73);

(iv) section 21 of the Federal Deposit Insurance Act (12 U.S.C. 1829b), chapter 2 of title I of Public Law 91–508 (12 U.S.C. 1951 et seq.), and subchapter II of chapter 53 of title 31, United States Code (collectively known as the ‘Bank Secrecy Act’); or

(v) any other Federal, State, or other criminal or civil law or regulation; and

(B) the lender shall not be subject to any penalties relating to loan origination, forgiveness, or guarantee of the covered loan based on such reliance.

This Act also provides that lenders will be compensated by the Administrator of the SBA:

(J) REIMBURSEMENT FOR LOAN PROCESSING AND SERVICING.—The Administrator shall reimburse a lender authorized to make a covered loan in an amount that is—

(i) 3 percent of the principal amount of the financing of the covered loan up to $350,000; and

(ii) 1 percent of the principal amount of the financing of the covered loan above $350,000, if applicable.

Bankruptcy Restrictions Softened By The New Act But Questions Still Remain

In what amounted to a complete 180 degree turn from previous iterations of the law, the new Act appeared to permit borrowers in bankruptcy to apply for PPP loans, except when you reached the last sentence of the Section you may have been surprised to read the following:

“The amendments made in [this section] take effect on the date on which the Administrator submits to the Director of the Executive Office for United States Trustees a written determination that, subject to satisfying any other eligibility requirements, any debtor . . . would be eligible for a loan . . . .”

Essentially, Congress has abdicated its ultimate rule making authority in this section and has instead chosen to allow the Secretary of the SBA to make the determination as to whether those in bankruptcy will be eligible for PPP loans.

It looks like Secretary Carranza may have already made her determination. The January 6th Interim Finals Rules provide the following:

“If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.”

So now it appears that borrowers in bankruptcy will not be permitted to receive PPP loans. This hardline determination seems contrary to what Congress initially permitted under the new Act. We anticipate that this rule could change again once the next session of Congress begins and elected officials get a chance to interface with the SBA on this issue. In the past we have seen Senators draft letters to clarify their intent in the CARES Act, specifically relating to the tax treatment of PPP loans (more on that later), so it would not be hard to foresee some officials making their position on this issue known to the SBA.

It will be a rainy night in Georgia for creditors if and when that happens.

The January 6th Interim Final Rules also provide that if your business is permanently closed then you will not be eligible to receive a PPP loan. Should borrowers in bankruptcy ever gain the ability to apply for PPP loans, this will be another hurdle for them to clear.

Simplified Application for Loans Under $150,000

Borrowers who received less than $150,000 in PPP loans during the first round will now only have to submit a one-page application for forgiveness, but all of the same rules apply. The signer of this application may as well sign the longer application to make sure that they have everything done right because personal liability can be enormous. Our recommendation is that clients consult with their CPAs carefully and fill out the long application but actually submit the short application, with their answers in the long application being kept in case they are ever investigated.

The law now states as follows:

(A) IN GENERAL.—Notwithstanding subsection (e), with respect to a covered loan made to an eligible recipient that is not more than $150,000, the covered loan amount shall be forgiven under this section if the eligible recipient submits to the lender a one-page online or paper form, to be established by the Administrator not later than 7 days after the date of enactment of the Continuing the Paycheck Protection Program Act, that attests that the eligible recipient complied with the requirements under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)).

Changes to the Application Process for Forgiveness of Loans Between $150,000 and $2,000,000

In regards to the loan forgiveness application for covered loans between $150,000 and $2,000,000, the Act states as follows:

(A) IN GENERAL.—Notwithstanding subsection (e), with respect to a covered loan made to an eligible recipient that is more than $150,000 and not more than $2,000,000—

(i) the eligible recipient seeking loan forgiveness under this section—

(I) is not required to submit the supporting documentation described in paragraph (1) or (2) of subsection (e) or the certification described in subsection (e)(3)(A);

(II) shall retain—

(aa) all employment records relevant to the application for loan forgiveness for the 4-year period following submission of the application; and

(bb) all other supporting documentation relevant to the application for loan forgiveness for the 3-year period following submission of the application; and

(III) may complete and submit any form related to borrower demographic information;

(ii) review by the lender of an application submitted by the eligible recipient for loan forgiveness under this section shall be limited to whether the lender received a complete application, with all fields completed, initialed, or signed, as applicable; and

(iii) the lender shall—

(I) accept the application submitted by the eligible recipient for loan forgiveness under this section; and

(II) submit the application to the Administrator.

PPP Borrowers Can Select Covered Period for as Short as 8-Weeks and as Long as 24-Weeks

Borrowers are now able to choose anywhere between 8 to 24 weeks for the covered period during which they are required to spend a sufficient amount on qualified expenses in order to receive full forgiveness. This begins the day the borrower received the funds and ends on any day selected by the borrower, but no earlier than 8 weeks from the date the loan proceeds are received and no later than 24 weeks after such date of origination.

This change will enable borrowers to cut off the testing period before making a reduction in workforce that would cause the applicable reduction in workforce penalties to apply, as long as the workforce is at its pre-February 15th, 2020 levels on the last day of the Covered Period. The law now states as follows:

(4) the term ‘covered period’ means the period—

(A) beginning on the date of the origination of a covered loan; and

(B) ending on a date selected by the eligible recipient of the covered loan that occurs during the period—

(i) beginning on the date that is 8 weeks after such date of origination; and

(ii) ending on the date that is 24 weeks after such date of origination;

chart

Gassman, Crotty & Denicolo, P.A.

In the January 6th Interim Final Rules the SBA eliminated the “alternative covered period” which allowed borrowers to start their covered period on the start date of a payroll period for payroll cost purposes rather than on the date the loan was received. The covered period is now strictly any date between 8 and 24 weeks after receipt of the loan.

Now that PPP borrowers are also permitted to receive the Employee Retention Tax Credit, they will need to be very careful to ensure that there are enough payroll expenses payable for the purpose of PPP forgiveness before they begin claiming Employee Retention Tax Credits considering the fact that borrowers are not permitted to claim both the ERC and PPP forgiveness on the same qualified wages.

Owner’s $100,000 Wage Limitation Now Applied On An Annualized Basis

Some borrowers may recall that during PPP round one, when calculating their payroll expenses, an S or C corporation owner’s countable wage was capped at $100,000. This meant that, depending on which covered period the borrower selected (either 8 or 24 weeks exactly), forgiveness for an owner’s compensation would be capped at $15,384 or $46,153 respectively.

Now, however, in recognition of the new rule which allows a borrower to choose any covered period between 8 and 24 weeks long, an owner’s forgivable wage will be applied on an annualized basis. This means that an S or C corp owner who makes $100,000 or more per year will have forgivable wage amount capped somewhere between $15,384 or $46,153 depending on which day between 8 to 24 weeks the borrower chooses to end their covered period on.

The Act reads as follows: SEC. 344. APPLICABLE PERIODS FOR PRORATION. Section 7(a)(36)(A)(viii) of the Small Business Act (15 U.S.C. 636(a)(36)(A)(viii)) is amended—

(1) in subclause (I)(bb), by striking ‘‘in 1 year, as prorated for the covered period’’ and inserting ‘‘on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred’’; and

(2) in subclause (II)—

(A) in item (aa), by striking ‘‘an annual salary of $100,000, as prorated for the covered period’’ and inserting ‘‘ $100,000 on an annualized basis, as prorated for the period during which the compensation is paid or the obligation to pay the compensation is incurred’’;

(B) in item (bb), by striking ‘‘covered’’ and inserting ‘‘applicable’’

Borrowers Can Amend Loan Applications to Request An Increase In Their PPP Loan Amount As A Result of A Rule Change But Not If They Miscalculated How Much They Were Eligible For

The Act requires that the SBA issue guidance to lenders within 17 days to provide a process for borrowers who returned all or part of their PPP loan to reapply for the maximum allowable amount so long as they have not filed for forgiveness. The Act also allows borrowers that would have received an increased loan amount due to changes in interim final rules issued by the SBA or as a result of the Act to reapply for the difference.

Readers should note, however, that a borrower will not be permitted to apply for a loan increase simply because they made a mistake in calculating their maximum loan amount on their initial loan application. This seems unfair and is sure to result in malpractice lawsuits against professionals who were doing their very best to assist borrowers under tough circumstances.

The January 6th Interim Final Rule does provide that the following borrowers can reapply or request an increase for their first round loan:

  • Borrowers who returned all of their initial PPP loan amount
  • Borrowers who returned part of their initial PPP loan amount
  • Borrowers who did not accept the full amount of their initial PPP loan

While we will likely need further guidance from the SBA, the January 6th Interim Final Rules provide that a borrower’s lender may submit an electronic request through the SBA’s E-Tran Servicing site to increase the PPP loan amount. The borrower will be required to provide the lender with documentation to support the calculation of the increase.

Furthermore, any amendment to a loan application or request for additional amounts must be submitted on or before March 31, 2021. These additional amounts will subject to the availability of funds.

Many borrowers who applied for loans very early on may find that the rules used to determine maximum loan amounts have since changed thereby making them eligible for larger loans. Below are some subsequent rule changes that will likely make many borrowers eligible for larger loans should they choose to amend their loan application:

05/19/20 Seasonal Employers Rule Update: If a seasonal employer received a loan before the alternative criterion for such employers was posted on April 28, 2020, and would be eligible for a higher maximum loan amount under the alternative criterion, the lender may electronically submit a request for an increase to the PPP loan amount.

05/19/20 Partnership Rule Update: If a partnership received a loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, the borrower may request an increase to the loan amount to include appropriate partner compensation. Partners in a partnership can compute their maximum loan amount using either the 2019 or 2020 net earnings from self employment as reported on the IRS Form 1065 K-1 and are still reduced by the following: (i) Section 179 expense deduction claim; (ii) unreimbursed partnership expenses; and (iii) depletion on oil and gas properties. This is totaled and multiplied by .9235 which is intended to remove the employer share of self employment taxes consistent without payroll costs for employees in the partnership is determined.

05/22/20 Rule Update for Tipped Employees: The Interim Final Rule posted on 05/22 allows borrowers to factor tips paid by customers to employees into their calculation of payroll costs.

Amend your initial application to include expenses for group insurance costs like group life, dental, vision, and disability insurance which were included in the new Act: The provision in the new Act that added these expenses as eligible payroll expenses is retroactive all the way back to the enactment of the CARES Act in March.

Relief for Schedule F Farmers – Did They Give Away The Farm?

There was some confusion as to whether farmers reporting income on Schedule F were eligible to receive a PPP loan. Fortunately, the Act includes specific provisions that allows farmers reporting income on a Schedule F to qualify for a PPP loan based on their 2019 Schedule F gross income.

‘‘(ii) NO EMPLOYEES.— With respect to covered recipient without employees, the maximum covered loan amount shall be the lesser of—

‘‘(I) the sum of—

‘‘(aa) the product obtained by multiplying—

‘‘(AA) the gross income of the covered recipient in 2019, as reported on a Schedule F (or any equivalent successor schedule), that is not more than $100,000, divided by 12; and

‘‘(BB) 2.5; and . . .

Interestingly, the Act seems to base the loan calculation upon a Schedule F filer’s gross income as opposed to their net income. Schedule C filers are required to file loan applications based upon their line 31 net income. It is currently unclear if this deviation from the norm was intentional, but as it stands, Schedule F filers may use line 9 of their Schedule F to determine the loan amount they’re eligible for.

The January 6th Interim Final Rules seems to confirm this – are they simply making the same mistake or was this distinction made on purpose?

Expanded Eligibility for 501(c)(6) Organizations

Organizations that are classified as a 501(c)(6) will have expanded eligibility to PPP loans. A 501(c)(6) is defined as follows:

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Regarding 501(c)(6) eligibility, the Act states the following:

(I) IN GENERAL.—Except as provided in subclause (II), any organization that is described in section 501(c)(6) of the Internal Revenue Code and that is exempt from taxation under section 501(a) of such Code (excluding professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity) shall be eligible to receive a covered loan if—

(aa) the organization does not receive more than 10 percent of its receipts from lobbying activities;

(bb) the lobbying activities of the organization do not comprise more than 10 percent of the total activities of the organization; and

(cc) the organization employs not more than 150 employees.

New Deadline To Apply For PPP Loans

The new deadline set by this Act to apply for a PPP loan is March 31st, 2021. Further, businesses and organizations that were not in operation as of February 15th, 2020 will not be eligible to receive PPP loans.

While these new deadlines are law now thanks to this new Act, it would not be unreasonable to believe that the SBA may amend/extend theses deadlines in the future as they did on multiple occasions for first round PPP borrowers during the summer of 2020.

We had hoped that the January 6th Interim Final Rules would give us an official re-opening date for the SBA’s loan portal but, sadly, that did not happen. We expect that the portal will be reopened any day now considering the SBA is only giving borrowers 3 months to apply for new loans.

New Grants For Shuttered Venues:

The Act sets aside $15 billion for “Shuttered Venue” grants which will go to entertainment venues that have been forced to close during the COVID-19 pandemic. Eligible recipients must show that they have suffered a 25% reduction in revenue in the first, second, or third quarter of 2020 as compared to the same quarter in 2019. These grants are similar but separate from PPP loans and they do not need to be repaid.

SEC. 324. GRANTS FOR SHUTTERED VENUE OPERATORS. DEFINITIONS.—In this section:

(1) ELIGIBLE PERSON OR ENTITY.— IN GENERAL.—The term ‘‘eligible person or entity’’ means a live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative that meets the following requirements:

(i) The live venue operator or promoter, theatrical producer, or live performing arts organization operator, the relevant museum operator, the motion picture theatre operator, or the talent representative—

(I) was fully operational as a live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative on February 29, 2020; and

(II) has gross earned revenue during the first, second, third, or, only with respect to an application submitted on or after January 1, 2021, fourth quarter in 2020 that demonstrates not less than a 25 percent reduction from the gross earned revenue of the live venue operator or promoter, theatrical producer, or live performing arts organization operator, the relevant museum operator, the motion picture theatre operator, or the talent representative during the same quarter in 2019

Grant payment to Shuttered Venues will be equal to 45% of the venue’s 2019 gross revenue with certain strings attached as to the usage of funds. An eligible person or entity may use amounts received from a grant under this section for the following:

(i) payroll costs;

(ii) payments on any covered rent obligation;

(iii) any covered utility payment;

(iv) scheduled payments of interest or principal on any covered mortgage obligation (which shall not include any prepayment of principal on a covered mortgage obligation);

(v) scheduled payments of interest or principal on any indebtedness or debt instrument (which shall not include any prepayment of principal) incurred in the ordinary course of business that is a liability of the eligible person or entity and was incurred prior to February 15, 2020;

(vi) covered worker protection expenditures;

(vii) payments made to independent contractors, as reported on Form–1099 MISC, not to exceed a total of $100,000 in annual compensation for any individual employee of an independent contractor;

(viii) other ordinary and necessary business expenses, including maintenance expenses, administrative costs, including fees and licensing costs, State and local taxes and fees, operating leases in effect as of February 15, 2020, payments required for insurance on any insurance policy; and, advertising, production transportation, and capital expenditures related to producing a theatrical or live performing arts production, concert, exhibition, or comedy show, except that a grant under this section may not be used primarily for such expenditures.

Shuttered venue grant recipients may not spend funds received from the grant on the purchase of real estate, for payments of interest or principal on loans originated after February 15, 2020, to invest or re-lend funds, or for contributions or expenditures to, or on behalf of, any political party, party committee, or candidate for elective office.

The January 6th Interim Final Rules confirmed that any borrower who receives a PPP loan after December 27th, 2020 will be ineligible to receive a shuttered venue grant and vice versa.

PPP Loan Recipients Now Eligible To Receive the Employee Retention Credit

Under the CARES Act, PPP loan recipients were not eligible to receive employee retention tax credits because both the loans and the credit were intended to be expended on employee payroll, so Congress made the two mutually exclusive.

Now, however, the eligibility requirements for the Retention Credit have been further reduced on top of PPP loan recipients becoming eligible for the Credit.

The one caveat for borrowers who receive PPP loans as well as the Retention Credit is that they may only claim the Credit on employee wages NOT paid with PPP funds. This may present an interesting balancing test for borrowers who need to ensure they fund enough payroll costs with PPP loans in order to gain full forgiveness and still meet the Retention Credit eligiblity requirements.

To be eligible for the Employee Retention Credit an employer must either (1) have the operation of the business fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19 OR (2) suffer a 20% reduction in gross receipts when comparing any quarter in 2020 to the same quarter in 2019.

Examples of eligible quarters are as follows:

chart

Gassman, Crotty & Denicolo, P.A.

Forgiven PPP Loans Will Be Tax Deductible

The IRS has issued a series of Revenue Procedures and Notices that alarmed many PPP borrowers by stating that expenses paid for with forgiven loans would not be deductible. This was against Congress’s intent, and the new Act clarifies this position by stating the following:

“(2) no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1)”

The IRS has subsequently issued Revenue Ruling 2021-2 which obsoletes the Notices and Rulings in which the IRS took the position that forgiven loans would not be tax deductible.

The meaning of this language and its implications for borrowers is discussed in a previously published blog post entitled “PPP Borrower Tax Relief Under Stimulus Bill – It’s Finally Happening.”

The New Kid on the Block—Targeted EIDL Program For Businesses Hardest Hit by the Coronavirus

The new Act creates a targeted EIDL program to assist businesses that were hardest hit by the economic impacts of the Coronavirus. The EIDL program was initially enacted many years ago to provide loans to businesses that have suffered from major storms, droughts, and other federally-declared disasters. EIDL loans bear interest at 3.75% and come with significant loan program requirements that very few borrowers are aware of or have thought about.

Businesses that receive EIDL loans are unable to pay several things without SBA approval, including paying dividends, paying bonuses to any employees, including non-owners, and using EIDL funds for anything other than business purposes.

EIDL borrowers must keep records of how the EIDL loan is spent, and provide this information to the SBA within 90 days after the loan is repaid. There is a lack of privacy for the borrower of an EIDL loan, and the loan details are available to the public because of the Freedom of Information Act, enumerated at 5 U.S.C. § 552. While these loans can save businesses, owners should speak with their advisors before making a decision to take these loans, and many borrowers will be well advised to pay their loans back while they can, especially if they might end up in bankruptcy and thus scrutinized by the Department Of Justice and other federal agencies who frequent the bankruptcy courts.

The term “covered entity” for the targeted EIDL program is stated as follows:

(i) means any entity that, during the covered period, is eligible for a loan made under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) (as expanded under section 1110(b) of the CARES Act (15 U.S.C. 9009(b))), if that entity—

(I) has not more than 25 employees; and

(II) has suffered an economic loss of not less than 30 percent; and

(III) except with respect to an entity included under section 123.300(c) of title 13, Code of Federal Regulations, or any successor regulation, does not include an agricultural enterprise.

The amount of funding that a covered entity is eligible for in the targeted EIDL program is stated as follows:

(A) IN GENERAL.—The amount of funding provided to a covered entity that submits a request under paragraph (2) shall be in an amount that is the lesser of—

(i) the amount of working capital needed by the covered entity for the 180-day period beginning on the date on which the covered entity would receive the funding, as determined by the Administrator using a methodology that is identical to the methodology used by the Administrator to determine working capital needs with respect to an application for a loan submitted under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)); or

(ii) $50,000.

The priority for the targeted EIDL program is as follows:

(8) PRIORITY.—During the 56-day period beginning on the date of enactment of this Act, the Administrator may approve a request for funding under this subsection only if the request is submitted by—

(A) a covered entity located in a low-income community;

(B) a covered entity owned or controlled by a veteran or a member of the Armed Forces; or

(C) a covered entity owned or controlled by an economically disadvantaged individual or a socially disadvantaged individual.

EIDL Advance Non-Taxable and No Longer Reduces PPP Loan Forgiveness

The Act also replenishes the EIDL Advance fund, which allows businesses suffering a substantial economic injury to apply for an advance that does not need to be repaid or up to $1,000 per employee limited to $10,000 total.

Prior law stated that any EIDL Advance received would reduce PPP Loan Forgiveness, essentially requiring the Advance to be repaid.

The new Act repeals this provision so the receipt of an EIDL Advance will have no impact on PPP loan forgiveness. Borrowers that have already applied for and received loan forgiveness presumably may now amend their application to request that the $10,000 EIDL Advance (or amount actually received) not reduce their forgiveness amount and request repayment.

The January 6th Interim Final Rules provided a complicated provision that may allow EIDL loans made between January 31st, 2020 and April 3rd, 2020 to be refinanced into PPP loans. We are still analyzing how this will work and what impact it will have on borrowers. That being said, we do know that borrowers will not be allowed to refinance an EIDL loan into a second draw PPP loan.

Other Select Tax Changes

  • Eligible individuals will receive stimulus checks of $600 per taxpayer ($1,200 for taxpayers married filing jointly) and an additional $600 per qualifying child. The payment phases out beginning at $75,000 ($150,000 if married filing jointly) in adjusted gross income. For more on this topic, check out our article: Stimulus Checks For Those Earning More Than $75,000/$150,000 – How It Works [hyperlink: https://www.forbes.com/sites/alangassman/2021/12/28/stimulus-checks-for-those-earning-more-than-75000150000how-it-works/?sh=1293afd3115c]
  • No repayment will be required if the applicable credit amount for the receipt of a stimulus check on a 2020 tax return is less than payment issued.
  • An additional $3 billion will be provided to the HHS Provider Relief Fund to assist health care providers in preparing for and responding to COVID-19 and to reimburse such providers for lost revenues.
  • The Medicare physician fee schedule was temporarily increased by 3.75% as another way to reimburse health care providers.
  • Additional Pandemic Unemployment Assistance payments of $300 per week will continue to apply through March 14, 2021 or for a maximum of 24 weeks.
  • Payroll taxes may now be deferred until December 31, 2021, and no penalties or interest will accrue until January 1, 2022.
  • The $250 educator annual expense deduction may now include expenses incurred for the purchase of personal protection equipment.
  • The Section 163(j) election to deduct otherwise limited business interest expenses will result in 30 year depreciation instead of 40 year depreciation for pre 2019 residential rental property.
  • Families First Coronavirus Response Act credits for paid sick and family medical leave will be extended through March 2021.
  • The Medical Expenses Itemized Deduction Floor will now be permanently set at 7.5% of adjusted gross income.
  • Taxpayers may now write off 100% of business meal expenses for 2021 and 2022 if the meal was provided by a restaurant and paid or incurred prior to Jan 1, 2023.
  • The above the line charitable deduction for cash payments to public charities made in 2021 will be $300 ($600 for taxpayers married filing jointly).
  • The ‘100% of adjusted gross income’ charitable limitation will continue to apply for 2021.
  • Unused benefits from Health and Dependent Care FSA plans may now be carried over to next tax year through the 2021 plan year.

This new law provides much needed relief to small businesses affected by the Coronavirus. There are sure to be changes and corrections in interpretation and meaning, and numerous SBA pronouncements that follow. Right now we have a good skeleton’s worth of guidance on this new round of PPP funding, but we will surely need more meat on the bones in the future. Stay tuned to this blog for future updates on PPP, EIDL, and Employee Retention Tax Credit guidance.

Thank you again to the SBA for doing a very nice job and publishing these regulations within hours after one of the worst crises we’ve seen in Washington D.C. in decades if not centuries.