Congress just passed another coronavirus stimulus package, and President Trump could sign it into law as soon as this week. The president is pushing for some changes to the bill, but he’s primarily pushing for larger stimulus checks. However, businesses are much more concerned with the bill’s changes to the Paycheck Protection Program (PPP). Keep reading to find out how Congress’s stimulus package affects the PPP lending program.
Paycheck Protection Program Updated Guidelines
The new stimulus bill adds more funds to the Paycheck Protection Program’s purse and allows affected small businesses to make “second draw loans” from the program. It also adds some important new guidelines for borrowers and tweaks to the loan forgiveness process. We’ll cover all these areas in detail below, so stay tuned.
Second Draw Loans
The December 2020 stimulus package adds another $284 billion to the Paycheck Protection Program’s purse and refers to the new round of loans as second draw loans. The maximum limit for second draw loans is $2 million, and the amount your business qualifies for will depend on your average monthly payroll in 2019.
To determine your approximate loan qualification, take your average monthly payroll for 2019, and multiply it by 2.5. In theory, this should add up to enough money to cover payroll expenses for two and a half months. However, restaurant and food businesses qualify for additional benefits. These businesses can multiply their average monthly 2019 payroll by 3.5, allowing them to access 40% more PPP funding than other sectors.
You can only qualify for a second draw loan if your business has 300 employees or less. That’s fewer than the 500-employee cut-off allowed under the first round.
If you still have money left from your first PPP loan, you have to spend it or have concrete plans to use it soon, or you cant qualify for a second draw loan.
Businesses have 24 weeks to use their second draw funds for payroll, rent, and mortgage expenses. This bill also expands the definition of qualifying expenses to include operating expenses, costs related to COVID-19 protection equipment for employees, and covered property damage.
25% Loss of Revenue Restriction
Businesses must certify that they’ve experienced a revenue drop of 25% or more to qualify for second draw loan. This is significantly different than the original stipulations, which only required businesses to state that economic uncertainty made the loan necessary.
To measure whether you qualify, compare your 2020 quarterly revenue (i.e., gross receipts) against your 1st, 2nd, and 3rd quarter revenues in 2019. You must show a 25% year-over-year loss in revenue for at least one quarter of 2020, meaning your total quarterly revenue must be at least 25% lower than the same quarter in 2019.
PPP Loan Forgiveness
You must use 60% of your second draw loan on payroll expenses to qualify for loan forgiveness. The bill also added a simplified one-page forgiveness application for loans of $150,000 or less.
Deducting PPP Expenses
The new stimulus package also clears up the controversial issue of PPP deductibility and taxation. The bill states definitively that business owners won’t be taxed on their forgiven PPP loans. These guidelines cover loans taken under the original CARES Act and second draw loans.
These guidelines override earlier IRS guidance stating that borrowers couldn’t expense wages and costs paid with PPP funds. However, the IRS was effectively taxing small businesses for their PPP loans under this interpretation.
Taxing PPP wasn’t Congress’s intention for the program. Lawmakers finally set the record straight in this bill. Now, borrowers can rest easier knowing they won’t miss out on deductions because their PPP loan was forgiven.
The bill also specifies that emergency EIDL Grants and Advances are also not taxable to the small business borrower, so businesses that utilized these programs also get some tax relief.
Dec. 2020 Stimulus Package Status
President Trump hasn’t signed the bill yet, but he hasn’t explicitly threatened to veto it either. Shortly after the bill’s passage, the president said the package’s $600 allocation for individual stimulus checks should be increased to $2,000. Since then, two prominent Congressional Democrats, Speaker of the House Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer (D-NY), have stated their support for the president’s position. However, the plan to increase the payments could get a cold reception from fiscal conservatives, and there’s no telling what Trump will do if he doesn’t get what he wants.
The general consensus on Wall Street seems to be that we’re either going to get this deal or a better one, so it’s a win-win situation. Besides, any changes should concern the allocation for direct public stimulus, so the PPP revisions will likely stay the same.
This is a fast-moving situation, but we’re monitoring it closely to keep our readers and clients informed. Sign up to our mailing list below to stay informed with the latest updates. Or, chat with one of our tax pros to learn how your business can conquer economic uncertainty in 2021.