Paycheck Protection Program Update: COVID-19 Relief Bill to Make New Loans Available, Reverse IRS Position on PPP-Forgiven Tax Deductions

Pillsbury Winthrop Shaw Pittman LLP

New COVID-19 Relief Bill includes key changes to the Paycheck Protection Program (PPP), including making second loans available to certain businesses, and clarifies that forgiven PPP loans will be tax deductible.

TAKEAWAYS

  • The new bill includes $284.5 billion in funding for the PPP program and instructs the Small Business Administration to issue new rules within 10 days of the bill’s enactment.
  • The bill rejects the IRS’ position, to this point, that loan recipients cannot treat forgiven PPP loans as tax deductible. The bill also contains expanded eligibility criteria, including carve-outs for broadcasters and certain nonprofits, as well as for hotels and restaurants.
  • On the evening of December 22, 2020, President Trump signaled that he would not sign the bill until Congress amended portions of it unrelated to the PPP.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed on March 27, 2020, provided forgivable loans of up to $10 million to qualifying small businesses under the PPP. We have provided client alerts over the last several months on numerous aspects of the program, including loan eligibility and “affiliation” concerns; the certification of loan “necessity,” including the SBA’s controversial new questionnaire targeting borrowers that received loans in excess of $2 million; changes to the program brought about by the PPP Flexibility Act; the mechanics of loan forgiveness (here and here); and SBA guidance affecting M&A activity among PPP borrowers.

COVID-19 Relief Bill Overturns IRS Policy

On December 21, 2020, Congress passed H.R. 133, a long-anticipated COVID-19 Relief Bill, that, among its $900 billion appropriation, includes $284.5 billion in new funding for PPP loans. Congress authorized commitments for new PPP loans until March 31, 2021. A key retroactive provision in the bill, particularly for businesses that already received PPP loans and now are pursuing loan forgiveness, is Section 276 which clarifies that businesses can claim tax deductions for expenses paid with PPP funds, whether or not the loans ultimately are forgiven. The bill states that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” of forgiven loan sums.

These tax deduction provisions reflect an important reversal of an Internal Revenue Service (IRS) policy that many in Congress had indicated, over the last several months, was contrary to Congressional intent in drafting the CARES Act. Although the CARES Act explicitly excludes any amount forgiven through the PPP from gross income, the IRS took the position that the tax code prohibits businesses from claiming tax deductions for expenses funded by a forgiven PPP loan. In guidance released in May 2020, the IRS cited section 265(a) of the tax code, which prohibits businesses from deducting expenses linked to tax-free income, and reasoned that PPP loan recipients would obtain a “double tax benefit” by deducting expenses that were forgiven through the PPP. Last month, the Senate Finance Committee forecasted the change now implemented in H.R. 133 when it issued a bipartisan statement that criticized the IRS’ position and stated: “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income.”

In addition to the important tax provisions of H.R. 133, the bill includes the following updates to the PPP:

Second-Draw Borrowers

  • The pre-existing PPP eligibility requirements continue to apply to first-time applicants.
  • A business that already received a PPP loan may borrow a second time, as long as the business has fewer than 300 employees, will use the full amount of its first loan, and had a 25 percent drop in sales from a year earlier compared with any quarter in 2020.
  • Businesses that were not in operation in 2019 may qualify for the PPP, if they were in operation on February 15, 2020, had gross receipts during the second, third or fourth quarter of 2020, and can demonstrate a 25 percent reduction in gross receipts compared with the first quarter of 2020.
  • PPP loans for previous borrowers are capped at $2 million.
  • In cases where a recipient returned or did not accept the maximum amount of a loan it was eligible for, the bill directs the Small Business Administration to issue rules that allow for such borrowers to either:

- (1) Reapply for the difference between the amount retained and the maximum amount; or

- (2) Request a modification to increase the amount of the loan to the maximum amount applicable.

“Sector 72” Companies

  • Subject to the $2 million cap, second-draw borrowers in the accommodation and food services sector (NAICS codes starting with 72) are eligible for up to 3.5 times their average monthly payroll (while second-draw borrowers generally are limited to 2.5 times their average monthly payroll).

Broadcasters and 501(c)(6) Firms

News stations, newspapers, and public broadcasting organizations are eligible for PPP loans.

  • These entities are eligible even if they are owned by a larger entity, as long as each location employs not more than 500 employees per physical location.
  • The bill requires a good faith certification that the funds will be used to support expenses for the producing or distributing locally focused or emergency information.
  • The bill waives any prohibition on loans to broadcast stations owned by publicly traded entities.

501(c)(6) organizations with 300 or fewer employees are eligible if:

  • The organization does not receive more than 15 percent of its receipts from lobbying activities;
  • The organization’s lobbying activities do not comprise more than 15 percent of its total activities; and
  • The cost of the lobbying activities of the organization did not exceed $1 million during the most recent tax year that ended prior to February 15, 2020.

Expanded List of Allowable Expenses

  • In addition to the allowable expenses enumerated in the CARES Act—primarily payroll, rent and utilities—the new bill adds the following to the list of expenses on which a PPP borrower may expend its loan:

Exclusions

  • Business are prohibited from participating in the PPP if they (1) were created in or organized under the laws of the People’s Republic of China (PRC) or Hong Kong; (2) have significant operations in the PRC or Hong Kong; or (3) have a member of the board of directors that is a resident of the PRC.

Changes to Economic Injury Disaster Loan (EIDL) Program

  • The bill allows small businesses in low-income communities that have fewer than 300 employees and have suffered a 30% economic loss to receive an EIDL advance up to $10,000.
  • Extends the covered period for emergency EIDL grants through December 31, 2021.

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