The same, but different — “PPP” is now familiar to every small business, but not everything about the re-opened Payroll Protection Program is the same. Here’s a run-down of how the new program works and what it translates into dollars-and-cents for your enterprise.
Who’s Eligible for the New PPP Loans?
The provisions of the new Payroll Protection Program (PPP) are covered in the Consolidated Appropriations Act (CAA) signed into law December 27, 2020 which provided $284 billion for the program through March 31, 2021. It’s governed by interpretive guidance released by the Department of Treasury and Small Business Administration, which at this writing are in the form of Interim Final Rules (IFRs).
In the law and related guidance, there’s essentially four categories of applicants who can apply for PPP monies:
- First-time borrowers: These are qualifying business that never applied for a PPP loan last year and are newly participating in the program. A few categories of applicants were added including housing cooperatives, TV and radio broadcasters, certain 501(c)(6) organizations, and others.
- Re-applicants: Qualifying businesses that applied for a PPP loan last year but returned the money in full can now re-apply.
- Increase-applicants: Those who originally applied and either (a) did not accept the full amount of the loan they were approved for, or (b) did not receive the full amount they should have been eligible for. Examples of category (b) are partnerships where banks failed to factor in partner guaranteed payments and seasonal employers now eligible for a higher maximum loan as a result of the CAA.
- Second draw borrowers: These are applicants who received a PPP loan last year and meet the qualifications to receive a second loan this year.
Second draw borrowers have their own set eligibility requirements to receive additional monies:
- They have spent, or will fully spend, their first round loan.
- They have fewer than 300 employees (lower than the 500 employees allowed for PPP 1 loans).
- They are not permanently closed, publicly traded, lenders, political strategists, or other niche categories.
- They aren’t obtaining the new Shuttered Venue Operator Grants (e.g., live performance venue, movie theaters, etc.).
- They experienced a 25% decrease in gross receipts for any one quarter during 2020 as compared to 2019, or for the entire year 2020 versus 2019.
There are many technical swords to be drawn over the definition of “gross receipts”, but some of the larger items to know:
- Gross receipts does not include proceeds from first round PPP loans.
- Gross receipts does not include sales tax collected.
- Gross receipts does not include net capital gains or losses.
- Gross receipts generally does include costs of goods sold and contractor flow throughs.
- Some additional guidance is available in IFR RIN 3245-AH63 on page 8.
PPP second draw loans under $150,000 will be required to self-certify about the 25% decrease during the application process, then provide substantiation via tax forms, financial statements, or bank statements at the time requesting forgiveness. Second draw loans over $150,000 will be required to provide substantiation at the time of application.
How Much PPP Money Are You Eligible For?
Okay, so if you’re eligible for a PPP second draw loan, how much can you expect? Second draw loans are generally calculated similar to first round loans:
- The loan amount is equal to 2.5x average monthly payroll as before, but no more than a maximum of $2 million (compared to $10 million available on first round PPP loans).
- For calculating “average monthly payroll”, you can use (a) 2019 (which may already be on file if applying with the same lender), or (b) 2020, or (c) payroll for the one-year period prior to the loan date.
- For self-employed folks, you can use your 2019 or 2020 Schedule C, and partners can use their 2019 or 2020 Schedule K-1.
- One difference is that food and accommodation industries (as defined by NAICS code 72 on IRS forms) qualify for 3.5x average monthly payroll to provide additional assistance for this particularly hard-hit industry
- There’s also a few differences for farmers and seasonal employers.
For re-applicants, their maximum loan amount is defined by the PPP 2 loan rules. But for increase-applicants, they’re eligible for the difference between what they qualified for under the PPP 1 rules and what was received (except for seasonal employers, who can use new ranges to re-calculated their maximum loan amount).
New loans are issued under similar loan terms as PPP 1 loans:
- Repayment is deferred during the covered period, plus 10-months, and
- Unforgiven amounts carry an interest rate of 1% and must be repaid within 5 years
What About Changes to PPP Forgiveness?
In order to qualify for forgiveness, an applicant must (a) spend at least 60% of the loan on allowable payroll costs, (b) spend the remainder on allowable non-payroll costs, (c) not reduce their employee headcount, and (d) not reduce employee salary/wages more than 25%.
The spending period (called “covered period” in PPP lingo) is anytime the applicant wants between 8 and 24 weeks (and there’s no more “alternative period” for the payroll costs as there were under PPP 1 rules).
Allowable payroll costs are essentially the same definition as before, but has been expanded to explicitly include group health, life, disability, vision, and dental plans.
Allowable non-payroll costs have been expanded from the previous four categories (mortgage interest, rent, utilities, interest on previously existing debt) to include four new categories:
- Covered operations expenditures: Refers to business software to run the operation such as accounting software, payroll software, sales software, delivery software, etc.
- Covered property damage costs: Relates to repairs stemming from vandalism or other public disturbances in 2020 that wasn’t covered by insurance.
- Covered supplier costs: Money spent on supplies essential to the operation of the business under an order in existence before the covered period (unless perishable goods).
- Covered worker protection expenditures: Operating or capital spending to adapt business activities to comply with public health guidance or requirements.
And safe harbor exceptions to the employee headcount and compensation maintenance requirements were tweaked, plus requirements effectively removed altogether for loans under $150,000. This is because loans under $150,000 now qualify for a simplified one-page form that effectively only asks the borrower to self-certify that they’ve spent the monies on allowable costs with at least 60% going toward allowed payroll costs.
Other Things to Know about the New PPP
Some additional things to be aware of for the re-opened PPP:
- PPP is under a staged release: To help money get to the hardest hit and sometimes harder-to-reach applicants, different borrowers and lenders are being permitted access to the program at different points in time (like minority business in low-income areas, community lenders, etc.). The program opens January 11 and is expected to be fully live for all applicants and lenders by January 22 (most likely January 19 according to some sources).
- PPP expenses are now deductible: Last year the IRS determined that expenses paid with forgiven PPP loans would not count as deductions to avoid a situation of “double-dipping” (tax free income and tax deductible costs). The new law now officially provides this ‘have-your-cake-and-eat-it-too’ tax treatment, which is a big help to small businesses.
- EIDL advances no longer decrease PPP forgiveness: In a change from the previous law, the $10,000 advance received by those who applied for an Economic Injury Disaster Loan (EIDL) no longer gets subtracted off the amount of PPP loan that’s eligible for forgiveness.
- Employee Retention Credit (ERC) no longer mutually exclusive: Under the previous rules, if you obtained a PPP you couldn’t also receive the ERC. (The ERC is a payroll credit you could claim for keeping employees even if you experienced a 50% drop in revenues.) Now you can get both, but you just can’t double-dip by using PPP money to be pay wages that you then claim for ERC.
- Additional guidance likely: Although lawmakers and regulators learned a lot from the first PPP round and anticipated problem areas, there’s likely still going to be additional guidance forthcoming for new issues and clarifications, so we’ll be staying tune and updating this blog post where applicable.
One More Plank in the Bridge thru COVID
The effects of COVID-19 continue to impact the globe and economies around the world, and this new round of PPP money is intended to continue supporting small businesses so they can stay afloat while we all try to get back to normal. There’s more anticipated under the incoming Biden administration, but in the meantime, if you’re eligible, be sure to avail yourself of second draw PPP loans now that you understand how they work and how they differ from those last year.
The ElementsCPA Team continues to work hard to support our Members through this challenging time and build towards an even stronger future — If you’re interested to learn more about joining our circle reach out to us on our Do We Fit? page and we’d be happy to talk!