The Consolidated Appropriations Act 2021, which was signed into law on December 27th, 2020, provides another $900 billion in funding for coronavirus relief for individuals and business owners. The new bill serves as an expansion of the 2020 CARES Act, offering additional funding and a number of key changes to both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program.
Although the rules for the new PPP and EIDL are similar to the original programs, there are some significant differences that you should be aware of as a business owner. Among these include new eligibility requirements, clarification of the tax implications of the legislation, and beneficial changes related to loan forgiveness.
While additional clarification and updates on the new programs are set to be released in the next few weeks, in this two-part series we’ll cover some of the most critical highlights you should know about. Here in the first part of the series, we’ll discuss the new loans available under the PPP.
A New Round of PPP Loans
The original PPP program from March 2020 included $349 billion in its initial funding. That money was gone within two weeks, which led to a second round of funding totaling $320 billion. The second round of loans ended in August 2020. This new legislation marks the third round of PPP funding, and it includes another $284 billion in loans to business owners to help cover their payroll and other basic operating costs during the pandemic.
The new PPP funding allows you to apply for a loan whether you received an initial PPP loan or not. The eligibility rules for the loans are somewhat different than before and are based on whether you are borrowing for the first time or already received money in the first two rounds. To be eligible for any of the new loans, a business must have been in operation by Feb. 15, 2020.
First Time Borrowers
If you did not receive a PPP loan in the first two rounds of funding, you can apply for this third round of funding and potentially qualify for up to $10 million as a new applicant. The program rules are essentially the same as during the first round, and the eligibility requirements include:
- Any business categorized under “Accommodation or Food Services,” such as restaurants and hotels with 500 or fewer employees per location
- Tribal businesses
- Independently owned franchises
- Self-employed workers, independent contractors, gig workers, and sole proprietors
Unlike the initial rounds, during this third round of funding, business owners in bankruptcy are now eligible for PPP loans, and the loans will be treated as administrative expenses.
Second Time Borrowers
If you previously received PPP funding in the first two rounds, you may be eligible for round three funding using what’s known as a “second draw loan,” provided you’ve used all of your previous funds or will use them.
Second-draw loans are capped at a maximum of $2 million, and to qualify your business must have 300 or fewer employees, down from the original 500 employee maximum. You must also demonstrate that you experienced a loss of at least 25% of revenue in any quarter in 2020 compared to that same quarter in 2019. This is a big difference from the original PPP guidelines that simply required you to state that economic uncertainty made the loan necessary.
This new round of loans is designed to fund 2.5 months of your payroll expenses. To determine how much you would qualify for under the second draw loans, take your average monthly payroll for 2019 and multiply it by 2.5. The bill has a special calculation for restaurants and other food service industries and provides those businesses a larger loan amount of 3.5 months of average monthly payroll.
For example, if you had an average monthly payroll in 2019 of $100,000, then your business would qualify for $250,000. If you were a restaurant or other qualifying food business, you would qualify for $350,000.
New Qualified Expenses
Like the first round of loans, the amount of funding you spend on eligible payroll costs—along with covered mortgage interest, rent, and utility payments—is eligible for forgiveness. The new bill also adds several new non-payroll expenses to the list of qualifying expenses for forgiveness, and these include:
- Covered operations expenses: This includes money spent on software, cloud computing, and other human resources and accounting needs.
- Covered property damage costs: This includes expenses related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
- Covered supplier costs: This includes expenditures to a supplier that are related to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the borrower’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.
- Covered worker protection expenses: This includes money spent on PPE and other adaptive measures to help comply with health and safety guidelines at the federal, state, and local level related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration.
60% of PPP Loan Must be Spent of Payroll
The second draw loans are eligible to be forgiven provided that 60% of the funds are spent on payroll costs. The PPP’s existing safe harbors on restoring full-time equivalent employees and salaries and wages also continue to apply to the new loans.
Tax Treatment of New PPP Loans
Under the new legislation, forgiven PPP loans will not be taxable to business owners. This applies to all existing PPP loans under the original rounds of funding as well as the new second draw PPP loans. Previously, the IRS had ruled that you could not deduct your wages and other qualifying expenses that you used your PPP funds on if your PPP loan was forgiven—which effectively created a tax on the loan.
There had been much confusion and debate on this part of the legislation, as it seemed to contradict the intent of the CARES Act, but this new legislation officially clears that up. This means you can have your PPP loan forgiven and still be able to deduct your payroll and other qualifying business expenses paid with your PPP money. Additionally, any income tax basis increase that results from your PPP loan will remain even if the PPP loan is eventually forgiven
PPP Loan Forgiveness
The SBA plans to create a simplified PPP loan forgiveness application for businesses whose PPP loans were less than $150,000. This simplified application will fit on one page and include loan information as well as certification from you that the funds were used properly and are eligible for forgiveness, but it will not include calculations or other additional information.
The SBA already has a simplified one-page PPP forgiveness application for borrowers of $50,000 or less. It is likely that the SBA will utilize a similar application for borrowers with loans of less than $150,000.
Keep in mind that even though the loan forgiveness form will be simplified, the funds must still be spent properly to qualify for forgiveness, and the SBA may audit these applications. With this in mind, be sure to keep careful documentation of how you spent these funds in case your loan is audited.
New PPP Loans Deadline
The new bill extends the PPP loans through March 31, 2021, or until funds are depleted.
Choose Your PPP Loan Covered Period
The first two rounds of PPP loans required that the time during which you had to use your loan funds (covered period) would be the eight-week period beginning on the date you received your loan proceeds. That was later expanded to 24 weeks.
However, this new round allows you to choose any length period between 8 weeks and 24 weeks, giving you more control in handling reductions to your staff, if needed, once PPP funds are depleted.
How to Apply
Like the first rounds of funding, the new round of PPP loans will be administered by SBA-approved lenders using a new version of the existing SBA 7(a) loan program. You can apply for your PPP loan through any of the 1,800 participating SBA approved 7(a) lenders or through any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution (meaning your local bank).
If you have trouble finding a lender, you can use the SBA’s PPP lender search tool.
According to the SBA, smaller businesses that did not receive a PPP loan the first time around can begin to apply on Monday, January 11th for the new loans. Those that did receive one of the original loans can apply for a second draw PPP loan beginning on Wednesday, January 13th, provided they meet the new eligibility requirements. For larger applicants, the program will open “shortly thereafter,” according to the SBA.
For more information on the program, check the PPP program website on a daily basis and stay tuned to our blog for weekly updates.
Don’t Wait To Apply
Contact us, as your Family Business Lawyer™, if you need help reviewing your options under the PPP program. Since there is only a finite amount of funding available, the sooner you apply, the better. Schedule an appointment with us today to learn more.
New $10,000 EIDL Grants
The CARES Act passed in March 2020 included a grant (or advance) of up to $10,000 for business owners. However, the SBA later determined those grants would only cover $1,000 per employee, and many business owners who didn’t get the full $10,000 felt cheated. What’s more, the funds available for the grants ran out before all eligible businesses received them. This new legislation appears to help remedy some of those issues.
The new legislation includes new targeted EIDL grants designed to assist businesses that were hardest hit by the economic impacts of the coronavirus, and Congress has allocated $20 billion for these grants. While these new grants are an extension of the emergency EIDL grants passed under the CARES Act, the eligibility requirements are a bit different than the initial program.
Eligibility Qualifications For the New EIDL Grants
To qualify for the full targeted $10,000 EIDL grant, your business must meet the following three requirements:
- Be located in a low-income community
- Have suffered an economic loss greater than 30%
- Not employ more than 300 employees
Additionally, your business must qualify as an “eligible entity” as defined in the CARES Act:
- A small business, cooperative, ESOP Tribal concern, with fewer than 500 employees (Note: It’s not clear yet if this requirement will be reduced to 300 employees for new EIDL grant applicants.)
- An individual who operates as a sole proprietorship, with or without employees, or as an independent contractor
- A private non-profit or small agricultural cooperative
- The business must have been in operation by January 31, 2020
- The business must be directly affected by COVID-19
For the purpose of the grants, an economic loss is defined as “the amount by which the gross receipts of the covered entity declined during an 8-week period between March 2, 2020, and December 17, 2021, relative to a comparable 8-week period immediately preceding March 2, 2020, or during 2019.”
At this point, it’s unclear how the SBA will require those who apply for the grants to document their economic loss, but we’ll update this as more clarifications are issued.
What Qualifies as a Low-Income Community?
In the text of the stimulus act, it uses a definition from the Internal Revenue Code to clarify what would qualify as a low-income community. In Section 45D(e)(1) of the IRS Code of 1986, a low-income community is defined as follows:
“The term ‘low-income community’ means any population census tract if (A) the poverty rate for such tract is at least 20 percent, or (B)(i) in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or (ii) in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income.”
In other words, you live in a low-income community if you meet any of the following three standards:
- If more than 20% of families in your community are below the poverty level.
- If the median family income in your community is 80% of that of your metro area or lower.
- If the median family income in your community is 80% of that of your state or lower.
For help determining whether or not your business is located in a low-income community under the EIDL rules, these instructions may prove helpful.
This mapping tool from the Census Bureau may also help you determine if your business is located in a low-income community. However, we recommend you do not rely on these outside resources to determine if you qualify for a grant, and instead wait for additional guidance from the SBA.
Tax Implications of the New EIDL Grants
The new legislation specifies that the EIDL grants are not taxable and that businesses who receive them will not be denied a tax deduction for qualified expenses paid for with the funds.
Repeal of PPP forgiveness penalty:
Moreover, the new law repeals the CARES Act provision that required PPP borrowers to deduct the amount of their EIDL advance grant from their PPP forgiveness amount. Therefore, EIDL grants will not be deducted from PPP for loan forgiveness purposes, and this applies to all EIDL grants, including those already received.
Applying For the New EIDL Grants
Under the legislation, a qualified business may submit a request to the SBA and receive the full $10,000 EIDL grant regardless of whether their application for an EIDL “is or was approved,” they accepted an EIDL loan, or they previously received a PPP loan. Any EIDL grant (not loan) previously received will be subtracted from the $10,000 EIDL grant.
The SBA is required to notify anyone who received a previous EIDL grant, or who applied but did not receive one because funding was exhausted, that they may be able to apply for the full $10,000 grant. It’s not yet clear how this contact will be initiated.
If a business requests an EIDL grant, the SBA has 21 days after receiving the request to verify whether the business is eligible. If eligible, the grant will be issued, and if not, the applicant must be notified why the SBA rejected their request. The legislation does not spell out the verification procedure other than to state that the SBA may request any documentation necessary, including tax records, even if that information has been requested before.
The legislation states the SBA will process applications in the order received, except that priority will be given to those who previously received an EIDL grant under the CARES Act, followed by those who did not receive a grant because funding was exhausted.
We do not yet know the procedure for requesting the full grant. However, the SBA has indicated that a new EIDL application portal will be available by January 17, 2021. For more information, you should monitor news from the SBA website, and stay tuned to our weekly blog for updates.
Deadline: The legislation extends the EIDL program through December 31, 2021.
EIDL Loans Are Still Available
Note that the new legislation allocates additional funding and makes eligibility changes to the EIDL emergency advance program, but not the loans themselves. While the new EIDL emergency grants won’t be available until January 17, 2021, the SBA is still accepting applications for its loans.
The EIDL program pre-dates the coronavirus pandemic, but the CARES Act relaxed its requirements, expanded eligibility, and authorized the $10,000 grants. The loans come with a 3.75% interest rate for small businesses (2.75% for non-profits), with a 30-year maturity and an automatic deferment of one year before monthly payments begin. Businesses can use the loan for working capital and operating expenses, including the continuation of healthcare benefits, rent, utilities, and fixed debt payments.
If you have not previously applied for an EIDL loan, you can do so by filling out an online application at the SBA website. When you complete the loan application, you will be given the option to check a box to be considered for the emergency EIDL grant. If you check that box, you may get a grant of $1,000 per employee. Additionally, we anticipate you may be considered for the full $10,000 targeted EIDL grant, but we do not have details on that process as of yet.
Keep in mind, if you just want an EIDL grant but not a loan, and you have not yet applied for either, you do not have to accept an EIDL loan. Some business owners choose to accept the grant, but not the loan, and that is perfectly acceptable.
Enlist Our Support
With new updates and clarifications being released all the time, it can be confusing trying to figure out your best course of action under these new programs. Contact us, as your Family Business Lawyer™, if you need help reviewing your options under either the EIDL or PPP program. Schedule your appointment today to learn more.
This article is a service of Stafford Law Firm. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Call us today to schedule.