COVID-19 Legislation: New Paycheck Protection Program Loan Rules Allow Second Round Funding and Deductibility of Expenses Paid with Forgivable Loan Proceeds 

Key Points

  • Past and future PPP loan recipients can deduct PPP loan-funded eligible expenses for federal tax purposes even if the loan is forgiven.
  • Expanded eligibility for new loans to include new categories of employers; existing borrowers who have not yet received loan forgiveness may increase loan amount based on expanded allowable expenses.
  • Expanded categories of expenses that can be paid from forgivable loan proceeds, including business software or cloud computing systems, 2020 vandalism expenses, certain supplier costs, and certain worker protection expenditures.
  • Eligibility for a new second-round loan is narrowed: borrower (with affiliates) has fewer than 300 employees, and borrower can show a decline of 25 percent or more in gross receipts for any quarter in 2020 compared to the same quarter in 2019 (with special rules for those not in business for all of 2019).

On Dec. 27, 2020, President Trump signed into law the end of the year COVID-19 relief and appropriations legislation passed by Congress that includes an extension of Paycheck Protection Program (PPP) loans until March 31, 2021 (or until funding is depleted), and makes changes to PPP loan rules, allows a second round of PPP loans for certain borrowers, allows increased loan amounts to include new types of expenses, and overrides the IRS position to allow deductibility of certain expenses paid from forgivable loan proceeds.

Deductibility of Expenses Covered By PPP Loans

Congress provided explicitly that business expenses paid for with a PPP loan that are otherwise deductible will be treated as deductible for federal tax purposes even if paid with forgivable loan proceeds. This change was retroactive so as to apply to PPP loans already funded under the existing PPP loan program during 2020.

Expanded Eligibility for New Loans

The legislation expands the type of borrowers that are eligible for PPP loans to include certain IRC 501(c)(6) nonprofit trade organizations and business leagues; certain destination marketing organizations; newspaper and broadcasting companies that were not previously eligible because of application of the SBA affiliation rules; and housing cooperatives with less than 300 employees. Subject to SBA approval, Congress has provided that companies in bankruptcy may obtain a PPP loan (with bankruptcy court approval), and such a loan (to the extent not forgiven) would be given priority in the bankruptcy.

No Longer Eligible for Loans

Congress also eliminated eligibility for certain entities effective with the new law, including publicly-traded companies, 501(c)(4) lobbying and political organizations, as well as entities with certain relationships to China or Hong Kong or that are required to register under the Foreign Agents Registration Act. In addition, any business that receives one of the Shuttered Venue Operator Grants provided for under the new law will not be eligible for a PPP loan.

Ability to Increase Loan Amount for Existing Borrowers

Employers who have already obtained PPP loans (including those who returned their loans) but who have not had their loans forgiven yet, can modify their loan amounts based on the expansion of allowed expenses if those changes result in a larger available loan.

Eligibility for and Amount of Second Round Loan

In order to be eligible for a second round loan, a borrow must (1) have been eligible for the initial PPP loans; (2) have used, or will by the time of disbursement of the second round funds, the full amount of the initial PPP loan; (3) have fewer than 300 employees (together with affiliates); (4) have a decline of 25 percent or more in gross receipts for any quarter in 2020 as compared with the same quarter in 2019. (Special rules apply to calculate the decline in gross receipts for entities that were not operational for all of 2019, including for businesses starting on or before Feb. 15, 2020.)

The second round loans may not exceed the lower of (1) 2.5 times the average total monthly payroll costs incurred or paid during (at borrower's election) the one year period before the date the loan is made or the 2019 calendar year; or (2) $2 million. The "2.5" multiplier is increased to "3.5" for employers assigned a North American Industry Classification System code beginning with 72 (e.g., restaurants, bars, hotels). Seasonal employers may use any 12-week period between Feb. 15, 2019, and Feb.15, 2020, to determine the average monthly payroll costs.

New Expenses Eligible for Forgiveness

In addition to the ability to use PPP loan proceeds for payroll costs (which has been clarified to include group health, life, dental, vision, and disability costs), rent or mortgage payments, and utilities as provided under prior law, borrowers now can use the forgivable loan proceeds for the following new types of expenses:

  • Covered operations expenditures: this includes payments for business software or cloud computing services that facilitate operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

  • Covered property damage costs: this includes costs related to property damage, vandalism, or looting from public disturbances during 2020 that were not covered by insurance or other compensation.

  • Covered supplier costs: this includes expenditures by the borrower to a supplier of goods that are essential for the operations of the business at the time of the expenditure; and made pursuant to contract, order, or purchase order in effect before the borrower's covered period under the loan, or, for perishable goods, during the covered period.

  • Covered worker protection expenditures: this includes any operating or capital expenditures that facilitate the adaptation of the borrower's business activities to comply with HHS, CDC, or OSHA requirements (or equivalent state or local requirements), with respect to COVID-19 during the period beginning March 1, 2020, and ending on the date the national emergency declaration ends. These expenditures may include: the costs of purchasing, maintaining, or renovating assets that create or expand drive-through window facilities; indoor, outdoor, or combined air or air pressure ventilation or filtration systems; physical barriers such as plexiglass "sneeze guards"; expansion of additional indoor, outdoor or combined business spaces; on-site or off-site health screening capabilities; or the purchase of certain personal protective equipment (PPE) necessary for compliance with guidance issued by HHS, DOL, and OSHA.

To obtain full loan forgiveness, the existing requirement that 60 percent of the forgivable expenses must be payroll costs and 40 percent non-payroll costs will still apply. (Partial forgiveness would still be available.)

Simplified Loan Forgiveness Process for Loans Up to $150,000

Borrowers of PPP loans of up to $150,000 will now have a simplified one-page certification process for obtaining loan forgiveness. The SBA may review and audit these loans, but is not required to do so.

Lender Hold Harmless

The legislation should provide lenders in the PPP loan program with more comfort since it provides (retroactively to enactment of the CARES Act in March 2020) that lenders can rely on any certification or documentation submitted by a PPP borrower that supports the application for the loan and the applicant's eligibility for the loan. An enforcement action will not be brought against a lender that acts in good faith regarding a borrower's loan origination or forgiveness applications and otherwise complies with applicable federal, state, and other regulatory requirements.

SBA Guidance Anticipated Soon

The SBA is required to issue rules to implement the changes to the PPP loan program within ten days of enactment (which was Dec. 27, 2020).



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