Last evening, President Donald Trump signed into law a $900 billion relief and stimulus package which notably will provide some welcome relief to a broad cross section of consumers, earmarks an additional $284 billion in funding to the Paycheck Protection Program (PPP), an additional $13.5 billion for Economic Injury Disaster Loans (EIDLs), as well as adding tax deductions for forgiven PPP loans.
The PPP, which began lending in early April, is designed to provide a financial safety net to stave off employee layoffs and help small businesses weather the effects of the COVID-19 pandemic. Since its inception, however, the PPP has been fraught with myriad ambiguities, requiring the Small Business Administration (SBA), which oversees the program, to issue several rounds of clarifications and updated guidance to ensure the program’s availability to as many struggling small businesses as possible. This latest legislation seems to have applied some of those valuable lessons, which should make the program more accessible to businesses most in need of a cash infusion. As of this writing, here’s what we know:
- As it was originally penned, the CARES Act allowed PPP funds to be forgiven if borrowers who receive and use PPP funds to cover payroll, rent and certain other operational expenses. But the payments giving rise to the forgiven PPP loans would not still be deductible expenses on their taxes. This latest law makes clear the fact that borrowers who received PPP funds that are forgiven can deduct from their taxes those expenses for which they used the forgiven loan funds – a double benefit to business taxpayers. Firms that received EIDL grants now are not required to deduct that amount from requested loan forgiveness. Likewise, forgiveness of EIDL grants will not taxed as income to the business recipients of those EIDL grants, and those taxpayers will be able to deduct the qualified EIDL expense payments.
- Both previous PPP borrowers and those businesses who did not apply for the original PPP loans, may apply for a new PPP loan (“PPP second draw” loans) if they have fewer than 300 employees and meet the new revenue test, which states that revenues must have declined by at least 25% over a comparable period in 2019 to qualify. Note: this is a change from earlier PPP guidelines, which allowed businesses with 500 or fewer employees to seek loans. Generally the new PPP loans are more focused (and in some cases earmarked for smaller employers).
- The new PPP loans maximum loan amount will be $2 million.
- For new PPP loans under $150,000, the new law creates a simplified application process.
- Public companies are prohibited from applying for PPP funds.
Most notably, the PPP redux answers questions about tax liability for borrowers whose PPP loans are forgiven, while giving businesses another chance at forgivable PPP loans this winter. It also makes clear the fact that the Small Business Administration, which will continue to administer the program, will be expected to provide additional guidance and clarification in the coming weeks. As previously reported, a key feature of the PPP is the ability of organizations that strictly adhere to the guidelines to have all or a portion of their loans forgiven.
Though it is not yet clear when companies will be able to apply for additional PPP funds, applications are expected to be accepted through March 31, 2021. In the interim, we strongly advise borrowers and interested borrowers to review your business’ best options with your tax, financial and/or legal professional. The Tax Group at Odin Feldman Pittleman will continue to follow news regarding the PPP and provide additional updates as details become clearer. Please direct your questions to OFP Shareholder David A. Lawrence at 703-218-2181.