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”).
Part I of this Tax Alert (See Whitley Penn Tax Alert: “New Legislation Expands PPP Loan Program – Part I: First and Second Draw Loan Eligibility and Application” dated January 13, 2020) addressed borrower qualifications and loan requirements for “first draw” and “second draw” PPP loans under the Act. This follow up alert addresses the rules related to the forgiveness of those loans.
First and Second Draw Loan Forgiveness
Borrowers can qualify for forgiveness of PPP loans up to the full amount of principal and accrued interest if the loan proceeds are used to pay eligible expenses during a specific “covered period”. The covered period begins on the date the loan proceeds are disbursed and ends on a date of the borrower’s choosing that falls between 8 weeks and 24 weeks after the covered period begins.
The loan forgiveness amount may be reduced if the borrower decreases the wages of any employee who earns less than $100,000 (on an annualized basis) or decreases its number of full-time equivalent employees. Certain exceptions and safe harbor thresholds may be available to alleviate the amount of the reduction. A borrower must use at least 60% of its PPP loan proceeds to pay for payroll costs in order to qualify for forgiveness of the full loan amount. Borrowers that also received an Economic Injury Disaster Loan (“EIDL”) advance are no longer required to subtract that advance from its forgivable PPP loan amount.
Expenses Eligible for Forgiveness
As previously stated, PPP loan proceeds may only be forgiven to the extent the borrower uses those proceeds to pay eligible expenses. The Act added several additional categories of costs that are now eligible for forgiveness. The additional eligible expenses can be forgiven for both first draw and second draw loans. However, if a loan was forgiven before the effective date of the Act, the borrower may not apply to increase the forgiveness amount to account for these new expense categories.
The expenses that are eligible for forgiveness include:
- Payroll costs – This includes owner-replacement income for self-employed borrowers. The Act expands eligible payroll costs to include group insurance for vision, dental, disability, and life insurance.
- Mortgage interest.
- Covered operations expenditures – This category was added by the Act and includes payments for software, cloud computing services, product or service delivery, payroll processing, human resources, sales and billing functions, and accounting or tracking of supplies, inventory, records, and expenses.
- Covered property damage costs – This category was added by the Act and includes costs related to property damage, vandalism, and looting attributable to public disturbances that occurred in 2020 that were not reimbursed by insurance or other means.
- Covered supplier costs – This category was added by the Act and includes expenses made by a borrower to a vendor for the supply of goods that are essential to the operations of the borrower and are made pursuant to a contract or order in effect for a specific time period.
- Covered worker protection expenditures – This category was added by the Act and includes operating or capital expenditures to facilitate the compliance of business activities with governmental health guidelines related to COVID-19. Payments for residential real property or intangible property do not qualify as covered worker protection expenditures.
Simplified Forgiveness Procedures
The Act provides a simplified process for forgiveness of smaller first and second draw loans. The SBA has not yet published the simplified forgiveness form, but it is anticipated that borrowers with loans of $150,000 or less will be required to sign and submit a one page form, attest that they complied with all PPP requirements, report the loan amount, report the number of employees retained and amount of the loan spent on payroll, and retain employment records for 4 years and all other records for 3 years. Second draw borrowers will also be required to provide documentation that substantiates the loss of revenue requirement under the Act.
Under the original PPP loan rules, borrowers that claimed the Employee Retention Credit (“ERC”) were not eligible for loan forgiveness. The ERC is a refundable payroll tax credit available to qualifying employers. The Act now allows borrowers to claim the ERC and receive PPP loan forgiveness. The provision is retroactive to the 2020 tax year.
Note that a borrower cannot claim the ERC for employee wages that are also included as part of PPP loan forgiveness. However, a borrower with sufficient payroll expenses to qualify for full loan forgiveness is now able to potentially fully utilize the ERC or it may elect to apply more non-payroll costs in the forgiveness calculation to maximize its utilization of the ERC (subject to the 60% compensation limitation).
The Act also specifically provides that expenses attributable to forgiven PPP loan proceeds are deductible for federal income tax purposes. Previously, the IRS had ruled that such expenses were not deductible since the loan forgiveness is not taxable. (See “Whitley Penn Tax Alert: IRS Issues Guidance on Deducting Expenses Funded with PPP Loan Proceeds” dated November 23, 2020).
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.