Payment Protection Plan Round 2

Congress released text for the second stimulus bill today.  Hopefully, the bill will be voted on (and passed) in the next day or two. 

The bill is full of several items that impact small businesses.  I won’t cover all of them in detail here.  I will cover those that you should be aware of and a few actionable items. 

With that, let’s jump in.

Changes to the Tax Treatment of Covered Loans

All summer and fall, the tax treatment of Paycheck Protection Program (“PPP”) loans had been up in the air.  When Congress first passed the CARES Act, it was never the intention that these loans would be taxable.  However, the IRS said otherwise.

While the loans themselves were not taxable, the expenses the funds were used for would not be allowable deducted. This could create a large tax bill for several companies.  It also would prevent other companies from carrying back large net operating losses to prior years.  Without the carryback, these companies would not be able to claw back previous taxes paid.

The updated Act says that no amount of the loan (forgiven or not) shall be included in the gross income of a recipient.  Further, no deduction shall be denied because of the exclusion from gross income provided by the loan’s forgiveness.

The updated Act goes on that any subsequent PPP loans shall be treated the same way.  Emergency EIDL grants and advances shall also be treated the similarly.  Lastly, any grants made under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act should be treated the same as well.

PPP Round 2

The Act did authorize the second round of PPP loans.  This is massive news as many small businesses are in dire need.  With initial unemployment claims rising steadily over the past four weeks, there are clear signs small businesses are struggling.

There will be additional guidance from the Small Business Administration released in the next ten days (as stipulated by the bill).  Still, there are plenty of questions that were answered by the text of the Act.

Who is eligible for a second loan?

A business must have been in operation as of February 15, 2020.  Further, they must have less than 300 employees.   If a business has more than 1 location, then the employee limit rises to 500. 

Here is the most significant eligibility requirement – the business must have seen a decrease of 25% or more in gross receipts during either the first, second, or third quarter of 2020 compared to the same quarter in 2019. 

If the business was not operating in 2019, or for only a portion of 2019, there are provisions for calculating a decrease in gross receipts.  I won’t go into more details but know there is specific language for these cases.  

During the last PPP go-around, the SBA released precise guidance for use cases like this.  I would imagine we’ll get the same. While Congress made sure the fundamentals of this calculation were well defined, there will be further clarification.

How much can a qualified business get?

For the most part, the calculation remains the same as the first round of PPP loans. Here is the language straight from the Act:

(aa) at the election of the eligible entity, the average total monthly payment for payroll costs incurred or paid by the eligible entity during—

                    (AA) the 1-year period before the date on which the loan is made; or

(BB) calendar year 2019; by

(bb) 2.5; or

(II) $2,000,000.

If you are one of the businesses that increased your salaries and wages over the past 12 months, it would benefit you to use section AA above.  However, if your wages have decreased from 2019, your calculation will be the same as the first round of PPP loans.

Note that if you are a seasonal employer, there are again different provisions for you.

There is a significant change for accommodation and food-service businesses.  If you are a business that uses a NAICS code that begins with a “72”, then you are eligible to use a multiplier of 3.5 instead of 2.5. The change increases the eligible amount by 40% for these businesses.

What can I spend the money on?

The same categories apply that did the first round – payroll (as was defined), rent, utilities, and mortgage interest.  However, this round, there are four new categories for qualified expenses:

  • Supplier costs –  Expenditure made by an entity to a supplier of goods for the supply of goods that are essential to the entity’s operations at the time at which the expenditure is made; and is made pursuant to a contract, order, or purchase order.  I am sure we’ll get more guidance on this.
  • Covered worker protection expenditures —Operating or capital expenses to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government.
  • Property damage cost – Cost related to property damage and vandalism or looting due to public disturbances that oc curred during 2020 that was not covered by insurance or other compensation.
  • Operations expenditures -A payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.

Sixty percent of the loan expenses must still be spent on payroll defined costs.

What period must these expenses be over to achieve forgiveness?

Nothing changes from the first round of PPP – each business can choose either an 8-week or 24-week covered period. 

Many businesses should examine this round if they would benefit from using a 24-week period.  This can provide a lot more flexibility.  All businesses should have discussion and planning with their accountant, controller, or CFO.

Impact on Forgiveness

Another enormous impact of the new Act is on the current and future forgiveness of loans.  The most significant impact is on loans less than $150,000.  For loans less than that amount, the SBA will develop a one-page application for forgiveness. 

The application will ask specific questions around how the proceeds were spent and the number of employees.  The new Act prohibits any business from being required to submit an application or documentation in addition to certifying their one-page application.   

The changes above will have an impact on current forgiveness applications. If you have not filed your application for forgiveness at this time, and your loan is less than $150,000, you should inquire of your banker.  It may make sense to wait for banks to implement this new process prior to asking for forgiveness. 

The Biggest Question Remaining

There are many questions still to be answered.  In my mind, the biggest will be around how forgiveness will be tied to full-time employee equivalent (FTE) counts.  If you remember, forgiveness the first time around was generally tied to the amount of FTEs that we retained.   Many businesses that will be applying for these loans will have reduced headcount.  Tying forgiveness to FTEs from 2019 will be difficult and may result in hardships for many business owners.  It will be vital that the SBA addresses this point.  

Additional Stimulus

In total, the portion of the Act pertaining to small businesses is just under 200 pages.  Several provisions not discussed may be applicable to your business. 

There are two other significant provisions I will touch on. 

First, there is an entirely new program developed for shuttered venue operators.  To be eligible, you must be a live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative.  There are additional qualifications, but you must first fall into one of those categories. 

I won’t dive deep into this program, as it would require many more pages.

Second, if you have an SBA Loan or are interested in getting one, several items will impact you.  Part of the CARES Act that didn’t get enough attention was the government making six months of SBA loan payments on behalf of SBA loan holders.  This program will continue for an additional eight months (starting 2/1/2021).  There are also several provisions to help to refinance debts with SBA backed loans.

If you have an outstanding debt that is not SBA backed, you should immediately discuss with your bank the option of refinancing that into an SBA 7(a) or Express loan.

There is almost too much to go through in this Act.  This was meant to give you the meat of what is the second round of PPP.  It was also meant to give you a high-level understanding of if additional help you may be eligible for.

Loans will most likely not be available until the second week in January at the earliest.  Still, you should be proactive with your banker and reach out over the next 3-5 business days (do not do it today, they are reading the guidance and learning with the rest of us). 

About Krieger Analytics

My name is Matt Krieger, and I am the founder of Krieger Analytics. We are a virtual CFO and bookkeeping services partner for small businesses and franchisors.  Our goal is to completely outsource your accounting department from bookkeeping to virtual CFO services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado. I know what running a business entails.

As a small business owner with a finance and strategy background, I realized the benefits that a virtual CFO could bring to smaller organizations.  Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper.  To better fit my clients, Krieger Analytics is a part-time resource.  While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more.  We partner with clients by coaching, giving them clarity into their business, and creating growth strategies.  Conversations are free, so don’t hesitate to reach out to me at [email protected].

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