On December 21st, Congress passed a new COVID-19 relief bill titled the Consolidated Appropriations Act that provides for a variety of financial stimulus measures, including $325B in aid for small businesses, $166B in assistance payments, $125B in unemployment benefits, and $25B in rental aid, among others. Significantly, the legislation provides helpful tax changes to the initial Paycheck Protection Program (PPP) and offers a second round of PPP loans (PPP2) to an expanded group of businesses facing difficulties during the COVID-19 pandemic.
The bill confirms that Congress’ original intent was for business expenses paid with PPP loan proceeds are deductible, even if the loan is forgiven. While it was clear that the forgiveness of PPP loans would not give rise to cancellation of indebtedness income, IRS previously indicated through informal guidance that expenses incurred with the proceeds of a forgiven PPP loan would not be deductible. The bill retroactively preempts that IRS guidance giving small businesses an added tax benefit from the first round of PPP loans.
PPP2 loans are available to both first time borrowers and those who took advantage of the first round of PPP loans. Although similar, there are notable differences between PPP and PPP2:
- Borrowers can receive up to 2.5 times their average monthly payroll costs—same as the first round—however the new loans are capped at $2M.
- Borrowers may elect either an 8-week or 24-week covered period in which to use the loan.
- Second-time borrowers must have used (or will use) the full amount of their first loan and demonstrate a 25% revenue decline in any 2020 quarter compared to the same quarter in 2019.
- Self-employed individuals (including sole proprietors and independent contractors), churches and other non-profits, and 501(c)(6) organizations are eligible for PPP2.
- Borrowers are still required to spend at least 60% of the loan proceeds on payroll costs, while the balance can be used for rent, mortgage interest, utilities, and newly added eligible expenses including worker protection expenses (such as PPE), covered property damage costs, covered supplier costs, and operating costs including cloud computing and accounting services.
Finally, the bill made official the long-rumored simplified forgiveness procedure for PPP loans up to $150,000. The SBA must create an application to accommodate that simplified procedure within 24 days after enactment of the bill.
The Consolidated Appropriations Act is a welcome but long overdue measure to provide relief to businesses as the COVID-19 pandemic continues. Buckingham’s business and tax attorneys will continue to monitor the inevitable clarifications and modifications to this hastily passed legislation.