The Consolidated Appropriations Act of 2021 (CAA) was signed into law last month. The legislation contains billions of dollars in additional stimulus funding in response to the COVID-19 pandemic, as well as numerous unrelated provisions.
Paycheck Protection Program
The CAA includes another $284 billion in funding for forgivable loans through the Paycheck Protection Program (PPP), for both first-time and so-called “second draw” borrowers. New loans can be made through March 31, 2021, or until the funding is exhausted. The new law expands the allowable uses for PPP funds, provides a simplified forgiveness process for smaller loans, and clarifies the proper tax treatment of loan proceeds and forgiven amounts.
The second draw loans are intended for smaller and harder hit businesses. Two key requirements are the borrower must have no more than 300 employees and generally also must demonstrate at least a 25% reduction in gross receipts in one quarter of 2020 compared with the same quarter in 2019.
To qualify for a second draw, a borrower must have used (or will use) all of the proceeds of its first PPP Loan prior to applying for a second draw loan.
The second draw loans are limited to 2.5 times average monthly payroll costs in the year prior to the loan or the calendar year 2020 or calendar year 2019 at the borrower’s election. The maximum loan is $2 million. The exception to this is for accommodation and food service businesses may receive loans for up to 3.5 times their average monthly payroll.
Businesses can obtain only a single second draw loan, and businesses with multiple locations that are eligible under the initial PPP requirements can have no more than 300 employees per physical location.
The CARES Act, which created the PPP, limited the funds to payroll, mortgage, rent and utility payments. The CAA allows businesses to also apply the funds to:
As with the first round of PPP Loans, full forgiveness requires a 60/40 cost allocation between payroll and nonpayroll costs. In other words, you must spend at least 60% of the funds on payroll over your covered period, which may range from eight to 24 weeks.
The CAA creates a simplified forgiveness application for loans up to $150,000. Such loans will be forgiven if the borrower signs and submits to the lender a one-page certification form from the Small Business Administration (SBA). The certification requires a description of the number of employees retained due to the loan, the estimated total amount of funds spent on payroll and the total loan amount. Borrowers must retain relevant records regarding employment for four years and other records for three years.
The CAA also eliminates the previous requirement that borrowers deduct the amount of any SBA Economic Injury Disaster Loan (EIDL) advances from their PPP forgiveness amount.
Federal Income Tax Treatment
Additionally, the CAA addresses some of the confusion regarding PPP tax issues. It specifies that a borrower need not include any forgiven amounts in its gross income. And — contrary to the position taken earlier by the IRS — it states that borrowers can deduct otherwise deductible expenses paid with forgiven PPP proceeds. The CAA also provides that tax basis and other attributes are not reduced by loan forgiveness (special rules apply to partnerships and S corporations). These tax provisions apply to second draw loans, too. Certain states may not follow the federal tax treatment of loan forgiveness.
Other Financial Assistance
The CAA provides $20 billion for new EIDL grants for businesses in low-income communities and $15 billion for live venues, independent movie theaters and cultural institutions.
DGC has a proven process that utilizes our sophisticated model and incorporates our data analytics experience and accounting expertise to maximize PPP Loan forgiveness. If you have questions, please contact a member of your DGC client service team or George Shaw, CPA at 781-937-5125 / firstname.lastname@example.org or Kimberley Train, CPA, ABV at 781-937-5112 / email@example.com. You can also visit DGC's coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new resources to help you deal with the financial impact of the coronavirus on you and your business.
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