The Consolidated Appropriations Act, 2021 (the "CAA"), signed into law on December 27, 2020, is the second-largest federal stimulus package of 2020, following the CARES Act. The CAA provides $900 billion in COVID relief and reserves $284 billion for small businesses through a second round of Paycheck Protection Program ("PPP") forgivable loans, or as some are calling it, PPP2. But relief for businesses does not end at PPP loans. The CAA also provides additional tax deductions and expands the Employee Retention Credit. The SBA published its Interim Final Rules on January 6 (click here to access the IFR rules), implementing the CAA. Like PPP round 1, the SBA will be publishing applications, guidance and FAQs in the coming days, but in the meantime, this article provides an overview of PPP2 and relevant benefits of the CAA.
The CAA reopens access to the original PPP for businesses who qualified for a loan but did not receive a loan, and also for businesses who returned all or a portion of the loan. For a borrower who returned all or part of a PPP loan, it may reapply for an amount equal to the difference between amount retained and maximum amount applicable; and for a borrower who did not accept full amount of the loan, it may request modification to increase to the maximum amount applicable.
Most notably, the CAA allows for eligible small businesses who took PPP loans to apply for another loan of up to $2 million. To be eligible for PPP2 "second draw loans," the borrower must:
Eligible businesses with multiple locations may qualify for PPP2 provided they employ less than 300 people in each location. SBA size standards still apply, and applicants must still aggregate applicable affiliates when determining if it qualifies as a "small business." The original waiver of affiliation rules still apply as well. CAA affirms eligibility to certain organizations such as churches and other religious organizations, housing cooperatives with less than 300 employees, certain news organization, but also disqualifies certain organizations such as those business not in operation before February 15, 2020, publicly traded companies, and entities receiving Shuttered Venue Operating Grants under the CAA, to name a few.
To determine amount of the PPP2 loan, an eligible recipient may receive up to 2.5 times the sum of their average monthly payroll costs (capped at $2 million), but entities assigned to NAICS code 72 (Accommodations and Food Services) may receive up to 3.5 times average monthly payroll.
Forgiveness of PPP loan funds still depend on whether the borrower spends the PPP funds for allowable costs during the "covered period." However, the CAA now allows borrowers to choose a covered period that is at least eight weeks and no more than 24 weeks from the loan origination and expands authorized costs. While 60% of forgivable funds must be spent on payroll, the CAA allows borrowers to use PPP funds for additional expenses. In addition to payroll, rent, utilities, and covered mortgage interests, the CAA authorize PPP funds to be used for:
For loans under $150,000, the SBA will provide for a simplified forgiveness application, which is anticipated to be one page and only requires the borrower to provide number of employees the borrower was able to retain because of the loan, total amount of loan spent on payroll, and total loan amount. Although currently, SBA is using Form 3509 and Form 3510 Loan Necessity Questionnaires for loans in excess of $2 Million, the CAA requires the SBA to submit a forgiveness audit plan and reports of covered loans.
The CAA expands eligible tax benefits for PPP loan recipients in several important ways.
First, the CAA confirms that eligible business expenses paid with PPP loan proceeds are tax-deductible even if the PPP loan is forgiven. The CARES Act originally provided that forgiveness of a PPP loan would not result in the forgiven amount being included in the taxpayer’s gross income (as would normally be the case with debt forgiveness). The IRS issued Revenue Ruling 2020-27 and Notice 2020-32, in which it took the position that, for expenses paid with a PPP loan that was forgiven, the taxpayer could not also take a business expense deduction because to do so would result in the taxpayer receiving a double tax benefit. The CAA overrides the IRS’s position and explicitly provides that no deduction shall be denied because a PPP loan is forgiven. In response to the CAA, the IRS promptly issued Revenue Ruling 2021-2 in which it declared its prior Revenue Ruling 2020-27 and Notice 2020-32 obsolete and confirmed that otherwise deductible business expenses will be deductible even if they were paid with PPP loan proceeds and the taxpayer’s PPP loan is forgiven. Additionally, such taxpayer’s tax basis in its assets will not be reduced as a result of the forgiveness of the PPP loan.
Second, the CAA significantly expanded the CARES Act’s employee retention tax credit, which employers may now claim even if they receive a PPP loan. However, employers may not both receive an employee retention tax credit and seek PPP loan forgiveness for the same wages. An eligible employer that received a PPP loan and paid qualified wages which exceeded the amount of the forgiven PPP loan used to pay wages may now claim the employee retention tax credit retroactively. We expect guidance from the IRS regarding how employers may retroactively claim the credit.
Additionally, effective January 1, 2021, the following key changes expand the availability of the tax credit:
We anxiously await the publication of SBA’s second draw application form, SBA 2483-SD and the reopening of the PPP loan program. Currently, the CAA provides that the PPP and PPP2 loans will be funded through March 31, 2021, and applications will continue to be made through qualified PPP lenders. We anticipate that borrowers will have to make similar if not identical certifications when applying for the second round of PPP loan. New and previous borrowers should consult with their attorneys, tax advisors, and lenders to determine if they qualify for a forgivable PPP loan.
Holistic Billing Services is ready to help these practices resume operations and relieve the pressure of billing and coding so they can tend to their patients in these difficult times. To find out how we can get your acupuncture, massage therapy, or chiropractic practice back up to speed, contact our experienced team today.