On December 27, 2020, the “Consolidated Appropriations Act of 2021” was enacted into law. (See Whitley Penn Tax Alert: “Congress Passes Legislative Package that Provides Additional Coronavirus Relief” dated December 22, 2020). Included as part of this legislation, the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (“Act”) extended and provided an additional $284.5 billion of funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”).
First Draw PPP Borrowers
The Act allows eligible entities that did not receive a loan under the original PPP before its August 2020 expiration to apply for a loan under the terms of the original program. In accordance with the original program, entities that are eligible for a “first draw” PPP loan include businesses and nonprofits that were in existence on February 15, 2020, that have no more than 500 employees or meet specific SBA industry size standards. The Act also provides eligibility to additional types of borrowers with 300 or fewer employees including previously ineligible categories of nonprofit organizations, destination marketing organizations, local newspapers and TV and radio stations, and housing cooperatives.
Entities that are ineligible to borrow under the program include professional sports leagues, political organizations, entities that are permanently closed, entities such as theaters, museums, and zoos receiving certain grants under other federal programs, publicly-traded companies, hedge funds, private-equity firms, entities in bankruptcy, and household employers.
Sole proprietors, independent contractors, and self-employed persons may also borrow under the program. Hotels and food service businesses with more than one physical location that employ less than 500 workers per location are also eligible.
Eligible first draw borrowers may request a loan up to $10 million. The maximum loan amount is based on 2.5 times the average monthly payroll costs determined over a designated 12-month period that ends prior to the loan application date. The aggregate amount of loans available to all businesses that are part of a single corporate group is limited to $20 million. Economic Injury Disaster Loans (“EIDL”) received between January 31 and April 3, 2020, can be refinanced as part of the first draw PPP loan.
Self-employed borrowers determine their first draw loan amount based on 2.5 times the average monthly net profit based on their 2019 or 2020 Schedule C income. Net income is capped at $100,000. The Act allows farmers and ranchers who file Form 1040, Schedule F to determine their loan amount based on gross receipts rather than net income. Gross receipts are capped at $100,000.
A borrower that received a first draw loan prior to December 27, 2020, can request an increase in that loan if changes in previous guidance released by the SBA would result in an increased loan amount. A borrower may only request an increase in their original loan if that loan has not already been forgiven. The amount of the additional first draw is determined based on the approved amount and borrower treatment of the original loan proceeds. The SBA has yet to explain the process for how to request an increase in a first draw loan.
Second Draw PPP Borrowers
Certain taxpayers that previously obtained a loan under the original PPP program may be eligible for a second PPP loan. The second draw loans are available to entities that were in operation on February 15, 2020, have 300 or fewer employees, and experienced a 25% reduction in gross revenue between comparable quarters of 2019 and 2020. Entities that are ineligible for a first draw loan are also ineligible for a second draw loan.
The second draw loan is limited to $2 million. The loan amount is based on 2.5 times the average monthly payroll costs determined over a designated 12-month period that ends prior to the loan application date. This multiple is increased to 3.5 times the average monthly payroll costs for hotels and restaurants with less than 300 employees per location. The total aggregate amount of second draw loans available to all members of a single corporate group is limited to $4 million. A borrower may not refinance an EIDL loan as part of a second draw loan.
As previously stated, a borrower must experience a 25% reduction in gross receipts between comparable quarters of 2019 and 2020. The reduction is computed by comparing gross receipts during the first, second, third, and fourth quarters in 2020 to the same corresponding quarters in 2019. Borrowers may also elect to compare 2019 and 2020 annual gross receipts to simplify the computation. Annual gross receipts must be supported by amounts reported on the borrower’s federal income tax filings.
Gross receipts include revenue from sales of products or provision of services (reduced by returns and allowances), interest, dividends, royalties, rent, fees, and commissions but does not include net capital gains or losses, sales taxes, proceeds from intercompany transactions with foreign or domestic affiliates, and amounts collected as a result of an agency relationship. First draw or EIDL loan and advance proceeds are also excluded.
All entities applying for a first or second draw PPP loan must certify the loan is necessary to support the continuing operations of the business due to current economic uncertainty. A safe harbor is provided for loans with a principal amount of less than $2 million (See SBA and Treasury FAQ #46).
For loans in excess of $150,000, the required documentation to support revenue used to determine the previously described gross receipts reduction must be available at the time of the loan. For loans of $150,000 or less, the required documentation is not required until the loan forgiveness application is submitted. Documentation includes tax forms, financial statements, bank statements, and applicable payroll information.
The forgiveness of first and second draw loans will be addressed in Part II of this tax alert. For more information regarding new developments in tax law and the SBA loan programs, please click here to view our Tax Alerts and COVID-19 Resources.
Whitley Penn is continually monitoring the tax and economic developments related to the coronavirus pandemic and will send out additional alerts in the future. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.