Update to the Paycheck Protection Program (PPP)

A new round of stimulus is working its way to America’s small businesses. Here’s a look at some of the key provisions of the new law.

On December 27, 2020, Congress passed a new round of stimulus to assist small businesses during the pandemic.

New loan applications are available through March 31, 2021, and previous borrowers are eligible for a second draw. The new law clarifies the tax position of forgiven loans that will benefit business. Outlined here is a review of some of the key provisions in the new law.

Background

The Paycheck Protection Program (PPP) is the small business loan component of the CARES Act passed by Congress on March 27, 2020. The program is administered by the Small Business Administration (SBA) and is intended for businesses to keep their workforces employed during the COVID-19 crisis. Broadly, under the program the maximum loan amount is 2 ½ times the trailing 12-month average monthly payroll costs up to $10 million for eligible1 borrowers.  The key determinant for program eligibility is that “the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 

Forgiveness

The loans are forgivable if all the employee retention criteria are met and the funds are used for eligible expenses such as payroll costs, mortgage interest payments, rent or utilities during either the 8- or 24-week period after disbursement of the funds. The interest rate on the loan is 1%. Some loans have a maturity of two years and others five years. No collateral or personal guarantees are required other than the certification2 of need.

Revisions and Interim Guidance

Since enactment, several interim laws, rules and guidance have been issued to explain and clarify the program. For example, application forms were revised, the loan forgiveness process was simplified for some borrowers, liability for certification was explained, eligible borrowers were further defined and guidance was issued on the consequences of the sale or merger of a business on the loan status. In some cases, this guidance resulted in the return of some loans by large companies. The IRS also issued guidance stating that loan proceeds used to fund otherwise tax-deductible business expenses are not deductible if forgiven under the program.

Results of Round 1 

The initial bill authorized $349 billion in loans. This program was rolled out on April 3, 2020, and was depleted within two weeks. Congress increased the available amount by $310 billion later in April for a total of $659 billion. The original deadline to apply for a loan was June 30, 2020, but later extended to August 8, 2020, at which point the program was closed. 

As of August 8, 2020, the SBA reported that over 5.2 million loans were approved representing over $525 billion. The average loan size was about $100,000 and the number of participating lenders was 5,4604. Through November 2020, roughly $83 billion in loans were requested to be forgiven.

Seeking Advice 

Throughout this period, businesses have been consulting with their advisors with regard to applying for funds, meeting the disclosure requirements and submitting loan forgiveness documentation.

PPP Round 2: Key Provisions

On December 21, 2020, Congress approved another $284 billion for PPP, with some changes to the original program. The president signed the bill into law on December 27, 2020. 

Expanded Benefits and Eligibility

Under the new provisions, applicants in the hard-hit industries of accommodation and food services (hotels and restaurants) are eligible for loans of 3 ½ times their average monthly payroll, subject to a $2 million cap.

Round 2 also includes 501(c) (6) entities as eligible borrowers;these include trade associations, chambers of commerce andbusiness leagues. Certain housing cooperatives and broadcast news organizations are included. 

Forgiveness Criteria Expanded

The program also revised the loan forgiveness criteria. Borrowers are required to spend at least 60% (the original law required  75%)3 of the funds on payroll costs; the other 40% may be for mortgage interest expenses, rent and utility payments.  The bill expands forgivable expenses to include costs related to providing personal protective equipment (PPE) and other such equipment to protect workers and the cost to comply with COVID-19-related federal, state and local health and safety requirements. Costs related to property damage resulting from public disturbances are also covered under Round 2 updates. 

Second Draws

Existing PPP borrowers may apply for a second loan if they have 300 or fewer employees and can show that they experienced a 25% reduction in gross receipts during a quarter in 2020 compared with the same quarter in 2019. The maximum for a second draw loan is $2 million, a change from the $10 million maximum allowed in the PPP first round. Seasonal employers and new entities are also limited to $2 million. Second draw borrowers are ineligible if affiliated with the Peoples Republic of China or the Special Administrative Region of Hong Kong. 

Lenders Liability

Round 2 provides a liability shield for lenders if they rely on certifications and submitted documentation.

Forgiven Loans and Deductible Expenses 

The legislation also clarifies that businesses that receive PPP loans may deduct the expenses covered by forgiven loans.  Ordinarily loan forgiveness is taxable income, but this is not the case under PPP. Round 2 makes clear that the borrower can deduct the expenses paid. It states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act. This supersedes IRS guidance under Rev. Rul. 2020-27 that such expenses were not deductible and results in a double tax benefit.

Round 2 provides a simplified forgiveness application for loans of $150,000 or less. The certification form is one page in length.

EIDL5 Funds Not Offset

Borrowers are now not required to deduct the amount of any Economic Injury Disaster Loan (EIDL) advance from their forgiveness amount.

Privacy6

Although there was some discussion of keeping the identity of borrowers private, participants should be aware that all loans are and will be posted on a public website.

Program Availability 

New PPP loans are available through March 31, 2021.

Conclusion

Small businesses are the lifeblood of the U.S. economy, accounting for 44% of economic activity, creating two-thirds of net new jobs and driving U.S. innovation and competitiveness7

As vaccines become available and business activity continues to recover, the latest round of stimulus will provide needed relief to a crucial part of the U.S. economy.

  • 1. Office of Advocacy -U.S. Small Business Administration---https://cdn.advocacy.sba.gov/wp-content/uploads/2018/12/21060437/Small-Business-GDP-1998-2014.pdf) 

    2. Eligible applicants include business concerns, 501(c)3 nonprofit organizations, tax exempt veteran organizations, tribal business concerns, sole proprietors, independent contractors and other self-employed individuals. An applicant must have been in operation on February 15, 2020 and the workforce headcount is not more than 500 employees subject to affiliation rules. Excluded industries include businesses primarily engaged in lending or investment and passive investment in real estate. Hedge funds and private equity firms are not eligible. Round two included 501 ( c ) 6 organizations that have no more than 300 employees. There is also a special grant provision for shuttered venue operators like movie theaters, museums, theaters and zoos.

    3. The applicant is not required to demonstrate that it could not find credit anywhere else but is required to certify in good faith that the current economic uncertainty makes this loan request necessary to support ongoing operations.

    4. Participating Lenders - https://www.sba.gov/document/support-paycheck-protection-program-participating-lenders

    5. The Paycheck Protection Program Flexibility Act  (PPPFA) of June 5, 2020, reduced the percentage to be spent on payroll costs from 75% to 60%.

    6. List of Borrowers - https://home.treasury.gov/policy-issues/cares-act/assistance-for-small-businesses/sba-paycheck-protection-program-loan-level-data

    7. In addition to PPP law, the new law allocates an additional $20 billion to the Economic Injury Disaster Loan Program (EIDL).

    Application Form Round 1 -  https://www.sba.gov/sites/default/files/2020-11/2483-PPP-Borrower-Application-Form-508.pdf

  • This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. The services and products it provides are available only to “professional investors" as defined in the Securities and Futures ordinance of Hong Kong. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm") is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management's Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E1C 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and New Foundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. The information in this paper is as of January 2021 and is based on sources believed to be reliable but content accuracy is not guaranteed.