Shortly before the end of the bizarre and painful 2020 calendar year, the Consolidated Appropriations Act for 2021 (the Act) was signed into law, providing an additional $284 billion appropriation for the Paycheck Protection Program (PPP). The new round of PPP funding is available for both new borrowers and some repeat PPP borrowers that meet specified criteria. It should provide an important lifeline for restaurants, bars, hotels, and other hard-hit businesses that have suffered greatly during the pandemic.
This article aims to help businesses understand (i) whether they are eligible for the new round of PPP funding, (ii) the new and expanded list of expenses that can be paid with PPP funds, and (iii) the tax implications for PPP loans at the federal and state level.
Who is eligible for the new round of PPP funding?
Repeat PPP borrowers
Under the Act, borrowers that previously received a PPP loan can apply for a second PPP loan so long as they (a) do not employ more than 300 employees, and (b) experienced a 25% decrease in gross receipts during any fiscal quarter in 2020 as compared to the same fiscal quarter in 2019.
According to the latest guidance from the Small Business Administration (SBA), in calculating gross receipts, borrowers must include all revenue from all sources, whether received or accrued, in accordance with the borrower’s typical accounting method.
New eligible borrowers
The Act also expands the eligibility criteria to allow certain businesses that were previously ineligible to participate in the PPP. The following entities are now eligible to apply for and receive a PPP loan:
- News stations with a license from the Federal Communications Commission that either (a) have less than 500 employees, or (b) are a nonprofit operating as a “public broadcasting company.”
- Businesses that are majority owned or controlled by a business with NAICS code 511110 (newspaper publishers) or 5151 (radio networks, radio stations, and television broadcasters), that make a good faith certification that the proceeds of the loan will be used to support the component business that produces or distributes locally focused or emergency information.
- 501(a) tax-exempt “destination marketing organizations” that are engaged in the marketing and promotion of communities and facilities to promote travel and leisure.
- 501(c)(6) organizations that (a) do not receive more than 15% of receipts from lobbying activities, (b) have less than 15% of their total activities as lobbying activities, (c) did not exceed $1,000,000 in lobbying activities during the most recent tax year, and (d) do not employ more than 300 employees.
Expanded list of qualifying “covered expenses”
In addition to payroll, rent, mortgage interest, and utility expenses, borrowers may now use PPP funds for certain other expenses, provided that the borrower uses at least 60% of the loan funds for payroll expenses. The new list of forgivable costs and expenses includes:
- Business software or cloud computing software expenses that facilitate business operations (e.g., tracking of payroll, sales or billing functions, or inventory).
- Costs related to property damage resulting from vandalism in 2020 that are not covered by insurance.
- Certain supplier costs that are (a) essential to the borrower’s business and (b) were incurred pursuant to agreements or purchase orders in effect prior to the borrower’s applicable covered period.
- Capital expenditures incurred to facilitate compliance with safety standards issued by HHS, CDC, or OSHA (e.g., new ventilation systems, outdoor space expansions, and purchases of PPE).
Tax impacts of PPP loan forgiveness
Following the enactment of the CARES Act, the IRS issued guidance disallowing deductions for covered expenses funded by PPP loan proceeds when a borrower received loan forgiveness. The Act overrides that guidance, and the IRS officially retracted the prior guidance in Revenue Ruling 2021-2 released on Jan. 8, 2021.
Under the Act, both first and second round PPP borrowers who receive loan forgiveness (i) may claim deductions for covered expenses funded by PPP loan proceeds; (ii) do not have to reduce tax attributes; and (iii) are not denied basis increases.
In certain instances, loan forgiveness may give rise to cancellation of debt income (CODI) includible in a borrower’s gross income, potentially subjecting loan forgiveness to taxation. Fortunately for PPP borrowers, the Act explicitly excludes PPP loan forgiveness from CODI.