The new law, the Consolidated Appropriations Act, 2021 (CAA, 2021), includes a second round of Paycheck Protection Program (PPP) loans. It also allows businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans.
In March 2020, the Coronavirus Aid Relief and Economic Security (CARES) Act was enacted. The CARES Act authorized the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans (Original PPP Loans) to eligible recipients. Taxpayers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover certain other expenses.
Paycheck Protection Program II Loans
The CAA, 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP2 Loan of up to $2 million. In order to qualify for a PPP2 Loan, a taxpayer must have taken out an Original PPP Loan. (First-time PPP loans are once again available after December 27, 2020.) In addition, prior PPP borrowers must meet the following conditions to be eligible for the PPP2 Loans:
• Employ no more than 300 employees per physical location;
• Have used or will use the full amount of their first PPP loan; and
• Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.
Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.
Borrowers may receive a PPP2 Loan of up to 2.5 times the average monthly payroll costs in the one year period prior to the loan date or in calendar year 2019. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP2 Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Gross Receipts And Simplified Certification Of Revenue Test
Taxpayers who borrow PPP2 Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue (gross receipts) loss requirement.
Like Original PPP loans, PPP2 Loans may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income.
Deductibility Of Expenses Paid By PPP Loans
The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. IRS took the position that these expenses were nondeductible. The CAA, 2021 provides that expenses paid both from the proceeds of loans under Original PPP loans and PPP2 Loans are deductible.