A deal on the rescue package to deliver aid to struggling Americans has suddenly come within reach after a major breakthrough on Saturday, December 19, that was ultimately agreed to by both the House and the Senate late on Sunday night.
Lawmakers are expected to vote late on Monday and send the bill to President Trump for signature. The bill will provide approximately $900 billion in coronavirus relief.
The bill includes approximately $325 billion in small business relief, including $284 billion in forgivable loans for small businesses through the Paycheck Protection Program (PPP); an extension of federal unemployment benefits at $300 a week through March 14, 2021, and another round of stimulus checks for Americans earning less than $75,000 in the amount of $600.
One of the major provisions impacting small businesses relates to the allowed deductibility of expenses paid with PPP funds.
As we have discussed through many of our information blasts and webinars, the IRS had issued a series of Revenue Procedures and Notices stating that expenses paid for with forgiven loans will not be able to be deducted, and as we had noted this appeared to be against Congress’s intent. The new bill clarifies this position as, “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 provided”. As such, the provision would ensure that PPP recipients can deduct the payroll costs and other expenses covered by forgiven loans, even though the loans themselves are tax-free income. Importantly, this rule applies to ALL borrowers; even those who have already applied for forgiveness; and as such expenses paid with PPP funds are now completely deductible.
Additionally, the bill delivers a streamlined forgiveness for loans of less than $150,000.
Such borrowers will only be required to submit a one-page online or paper form, and will only be subject to audit if they commit fraud or use the proceeds for improper purposes. As such, it appears a small borrower will not be subjected to the required reductions in forgiveness amounts generally caused by slashing salaries or slashing headcount and the forgiveness application process will be greatly streamlined.
For borrowers who have not yet applied for forgiveness, the bill expands the opportunity to spend PPP funds across four (4) new non-payroll types of expenses:
- Covered Operations Expenditures (i.e., software and cloud computing, etc.);
- Covered Property Damage Costs (i.e. damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance);
- Covered Supplier Costs; and
- Covered Worker Protection (i.e., expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the CDC or similar).
The 60/40 payroll vs. non-payroll test still applies, so these added categories require borrowers to still maintain at least 60% of forgiveness attributable to the payroll category.
Lastly, with respect to a prospective round 2 of PPP funds, the bill allows new and old borrowers to receive a PPP loan if they meet the requirements of an “eligible entity”. The 2nd round of PPP will be capped at $2M for borrowers.
For participation in a subsequent round of PPP, borrowers will need to satisfy the “Necessity Test”. This test is to be based upon whether the loan is necessary to support the on-going operations of the borrower and is expected to be hard to meet by businesses that have survived one or two hard quarters but are now making ends meet while waiting for the virus and economy to clear. A borrower will have to have fewer than 300 employees (down from 500), and be able to establish, in general, that the company experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019. As such, this test will clearly not be passed by a high percentage of PPP borrowers who may have participated in the initial phase of PPP, and will create a critical assessment to be carefully addressed with the applicants’ CPAs, financial advisors, and legal counsel.
The new bill addresses the concerns and needed relief of many small businesses, however while supported by the House and Senate, it hasn’t formally been voted on yet and made into law. As of today, a vote is expected on Monday, December 21. While most experts believe it will pass, it’s not law until it does.
Even after this, the SBA will have a lot of work to do to make it function. The SBA will have only 10 days to implement the new regulations and 24 days for the simplified application.
Many experts and economists think this is a modest bill and it’s not nearly enough to save small businesses. As such, the Biden administration may have to negotiate another stimulus package in 2021, which could be a challenge pending the result of the Georgia Senate runoffs in January.
The full bill can be found at the following link.
We here at Blue & Co will continue to monitor the evolving developments and will continue to get the most timely information out to our clients as we get it. If you have any additional questions in the interim, please contact your local Blue & Co representative.