On Sunday, December 27th, President Trump signed the Consolidated Appropriations Act of 2021 into law. Included within the legislation is $900 billion of COVID-19 relief, including changes to the Paycheck Protection Program (“PPP”). The legislation ensures tax deductibility for business expenses paid with forgiven loans, creates a simplified forgiveness application for small loans, and offers businesses facing severe revenue reductions the opportunity to apply for a second loan.
The bill specifies that business expenses paid with forgiven PPP loans are tax-deductible. This means that PPP loan forgiveness is truly tax-free. This supersedes prior IRS guidance that such expenses could not be deducted.
The bill also creates a simplified forgiveness application process for loans of $150,000 or less. The SBA is to create an updated application form, no more than one page in length, that includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. 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.
Lastly, the new round of the PPP (“PPP2”) offers businesses facing severe revenue reductions the opportunity to apply for a second loan. PPP2 contains many similarities to the first round of the PPP (“PPP1”) but also has several important differences.
PPP2 loans will be available to first-time qualified borrowers as well as to businesses that previously received a PPP1 loan. Specifically, PPP1 recipients may apply for another loan of up to $2 million, provided they:
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the same parameters PPP1 had when it stopped accepting applications in August.
PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been reduced from $10 million in the first round to the previously mentioned $2 million maximum. Hotels and restaurants can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.