On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.
This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects all PPP borrowers. The changes below are based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.
Tax Treatment. Most importantly, Section 276 of the Act reverses the prior Internal Revenue Service guidance and provides significant tax relief to all PPP borrowers. Not only does the Act confirm that any cancellation of debt income obtained from forgiveness of the PPP loan is tax exempt (as provided for in the CARES Act), but now any tax deductible expenses used to generate such forgiveness may still be taken to reduce taxable income.
Covered Period Flexibility. Section 306 of the Act provides PPP borrowers with the flexibility of setting the length of the “Covered Period” for purposes of PPP loan forgiveness and FTE representations at any length between 8 and 24 weeks. The Covered Period will begin on the date of the origination of the PPP loan, and end on the date selected by the borrower that occurs between 8 weeks and 24 weeks after origination.
EIDL Advance Does Not Affect Forgiveness. Section 333 of the Act repeals a prior CARES Act provision that said that any forgiveness would be reduced by the amount of the EIDL Advance. We understand that newly processed forgiveness remittances from the Small Business Administration (SBA) already reflect this change, but we are awaiting SBA guidance for how they will handle previous EIDL Advance-based forgiveness reductions.
Simplified Forgiveness. Section 307 of the Act requires that the SBA, by January 20, 2021, to provide a new simplified forgiveness process for PPP loans of not more than $150,000. The new process is required to be a certification on no more than 1 page. The only items specified in the Act as to be included in this simplified form are the number of employees able to be retained, estimated amount spent on payroll costs, the total loan value, and an attestation of compliance with the requirements of the PPP loan program. No additional application or documentation is to be required. We are interested to see how the SBA and Treasury interpret the provision regarding attestation of compliance with the requirements of the PPP loan program, but regardless this new simplified forgiveness process should be a welcome relief to small PPP borrowers and the lenders that must process the applications. (As a reminder, over 75% of the PPP loans should qualify for this simplified forgiveness process.)
Expanded Permissible/Forgivable Uses of PPP Loan Proceeds. Section 304 of the Act adds four additional categories of expenses that are now eligible for forgiveness under PPP loans:
- Covered operations expenditures;
- Covered property damage costs;
- Covered supplier costs; and
- Covered worker protection expenditures.
We will provide more details following implementing regulations, but the Act provides basic details of these new expense categories. Covered operations expenditures are generally payments for business software or cloud services. Covered property damage costs are meant to cover any property damage, vandalism or looting related to public disturbances that occured in 2020 and were not covered by insurance. Covered supplier costs will cover the costs of purchasing goods that are essential to operations and were made pursuant to a contract that was in effect prior to the Covered Period (unless for perishable goods, in which case the contract can be entered into during the Covered Period). Covered worker protection expenditures should cover all operating and capital expenditures related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
Note: Payroll costs still must represent at least 60% of the total expenses for which forgiveness is sought.
Agent Fees. Section 341 of the Act clarifies that a PPP Lender is only responsible for paying the fees of an agent under the PPP for services which the lender has directly contracted with the agent. This should end, once and for all, the litigation brought by purported agents seeking fees under the provisions of the CARES Act.
Elected Federal Official Conflict of Interest. Any PPP borrower that is 20% or more owned by covered federal officials (generally the President, Vice President, cabinet member or member of Congress, and their respective spouses), must disclose the existence of their PPP loan by January 26, 2021.