Paycheck Protection Plan Round Two—What Businesses Need to Know

After months of stalling and deliberations, Congress has finally passed a new COVID-19 stimulus bill. This new relief is found in the “Consolidated Appropriations Act, 2021” and it includes earmarked funds for small business loans, including a new round of Paycheck Protection Program (PPP) funds.

Summary

Here’s a summary of what businesses need to know regarding Congress’s renewal of the Paycheck Protection Program:

$284 billion has been allocated to PPP and the program has been extended to March 31, 2021.

Second-draw loans are available for businesses with under 300 employees that continue to be affected by COVID-19.

The second round of loans is capped at $2 million compared to the $10 million cap on the first round.

There is expanded eligibility for businesses that may not have qualified in the first round of PPP.

Eligible expenses for forgiveness have been expanded for first and second draw loans

Congress and the IRS have given the green-light for businesses to deduct expenses that were paid with PPP first or second draw funds

Borrowers are now allowed to choose a covered period that is any period between 8 and 24 weeks.

For a more in depth look at these topics, read on below.

Eligibility for PPP Round Two

For this round of PPP, Congress has updated the eligibility requirements for first time and second time borrowers. The Act calls these “first-draw” and “second-draw” borrowers.

First Draw Eligibility

If you did not obtain a PPP loan under the initial round of the program, you can still apply as a first-time borrower if you meet the following criteria.

You must have under 500 employees.

Your business must have been operational before February 15, 2020.

Eligibility now extends to include certain news organizations, particular 501(c)(6) organizations, and certain entities who are involved in bankruptcy proceedings.

Otherwise, it appears that first-draw PPP loans will be made on the same terms as the original PPP loans found in the CARES act.

Second Draw Eligibility

Even if you obtained a PPP loan under the initial round of the program, you can apply for a second loan if you meet the following requirements.

You must have under 300 employees.

Your business must have at least a 25% reduction in revenues in at least one quarter in 2020 when compared to the same quarter in 2019.

You must have used, or will use, the full amount of the first-draw PPP loan.

PPP Loan Maximums and Limitations

The maximum amount a first draw PPP loan borrower may borrow is the lesser of:

2.5 times the average monthly payroll costs and healthcare costs.

$10 Million.

The maximum amount a second-draw PPP loan borrower may borrow is the lesser of:

2.5 times the average monthly payroll costs and healthcare costs in the year prior to when the loan was received or within the prior calendar year.

3.5 times the average monthly payroll costs and healthcare costs in the year prior to when the loan is given to businesses classified under Code 72 of the NAICS (which includes hospitality and entertainment businesses including restaurants and hotels).

$2 Million.

Expanded Expenses and Flexible Coverage Periods

One exciting benefit for businesses taking advantage of first or second-draw PPP loans is that Congress has expanded the list of qualified expenses eligible to receive forgiveness.

To be eligible for full forgiveness, first and second draw borrowers of PPP Round 2 funds must use funds as follows:

60% of the loan must be spent on employee payroll costs, group health insurance payments, disability payments, life insurance, or owner compensation costs.

40% of the loan must be spent on paid time off and leave, pension retirement plans, federal income and FICA taxes, state unemployment insurance, utilities, rent, interest on mortgage payments, business software, costs related to property damage or vandalism in connection with the 2020 unrest, supplier costs that are essential to the operations of the business, PPE that helped business stay safe with COVID-19, or other measures that helped business comply with COVID-19 safety guidelines.

In addition to expanding the qualified expenses, Congress is now also allowing more flexibility in choosing the covered period within which PPP loan funds must be spent to qualify for forgiveness. Business can now choose a covered period that is anywhere from 8 to 24 weeks after receiving the loan.

Taxes and Deductibility of Forgiven PPP Expenses

Congress also cleared up a major concern under the CARES Act and the initial round of the PPP program – deductibility of expenses paid with PPP loan proceeds. The IRS had taken the position that expenses paid with PPP loan proceeds were not deductible; meaning, each loan recipient would have to pay taxes associated with the loan proceeds used to pay such expenses (such proceeds would be considered by the IRS as gross income). Congress clarified that all such expenses paid with PPP loans are deductible. Under both first and second draw loans:

Any expenses paid for with PPP loan proceeds that are forgiven will be tax-deductible.

PPP loan amounts that are forgiven will not count as gross income for the business.