On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the "Act") which contains new COVID-19 pandemic relief provisions—including clarifications to the Paycheck Protection Program ("PPP") established by the CARES Act. For your convenience, key implications for businesses are summarized below:
1. Tax Implications: PPP Loan Expenses Are Tax Deductible
The Act provides that business expenses paid for with forgiven PPP loan proceeds are tax deductible under the Internal Revenue Code. This reverses previous IRS guidance that such expenses were not deductible. Providing welcome relief to loan recipients, the Act specifies that "no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by [the provision stating forgiven PPP loans do not count as income]." For PPP loan recipients that already submitted a tax return, talk to your accountant about amending your return if you did not previously deduct your expenses.
Additional Deduction: The Act also temporarily allows for the full deduction of business meals provided by a restaurant paid or incurred between December 31, 2020 and January 1, 2023.
2. Second Round of PPP Loans
The Act also injects another $284 billion into PPP loans, allowing first-time borrowers to apply for a PPP loan and businesses that previously received PPP funds in the first round of loans to qualify for additional funding if they demonstrated specified reductions in gross receipts.
To receive a "second draw" of PPP funding, borrowers must:
- employ fewer than 300 people (or meet an alternative size standard),
- have used or will use the full amount of their first PPP loan, and
- demonstrate there was a 25% reduction from the gross receipts of the entity during at least one quarter in 2019 compared to the same quarter in 2020.
Borrowers may receive loan amounts of up to 2.5 times their average monthly payroll costs in the one year period prior to the loan date or the 2019 calendar year, but the second round of funding is capped at $2 million per borrower (rather than $10 million under the first round). The Act also made clear that group life, disability, vision, and dental insurance benefits may be included in calculating payroll costs.
Accommodation and Food Service Industry Adjustment: Borrowers in the accommodation and food service industry (NAICS code 72) are eligible to receive 3.5 times their average monthly payroll costs in the one year period prior to the loan date or the 2019 calendar year (capped at $2 million per borrower), provided borrowers with more than one physical location do not employ more than 300 employees per physical location (down from 500 employees per physical location in the first round of funding).
Seasonal Employer Loan Amount Calculation: For seasonal employers applying for a new PPP loan, the maximum loan amount is based on the average monthly payroll costs for a 12-week period selected by the employer that begins February 15, 2019 or March 1, 2019 and ends June 30, 2019. Or, the employer may elect to use any consecutive 12-week (any 96 consecutive days) period beginning after February 14, 2020 and ending before January 1, 2021 multiplied by 2.5, not to exceed $2 million.
Loan Forgiveness: Borrowers will receive full loan forgiveness if they spend a minimum of 60% of their second round PPP loan on payroll costs over a time period of their choosing between eight weeks and 24 weeks. As with the first round of funding, costs eligible for loan forgiveness include payroll, rent, covered mortgage interest, and interest. The Act also makes facility modification expenditures (such as drive-through window facilities and an expansion of additional indoor or outdoor business space), personal protective equipment, and operating costs for software and cloud computing services potentially covered. Publicly traded companies are not eligible for the new PPP loans.
Good Faith Certification: Importantly, although a borrower may technically qualify for the second round of PPP loan funding, borrowers will still need to certify in good faith, as set forth in the CARES Act, that the "uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations" of the borrower. This good faith certification may, in some cases, be more difficult for borrowers to make now than it was in early 2020, depending upon the borrower's financial performance in 2020. For the first round of PPP loans the Small Business Administration ("SBA") issued guidance that any borrower, together with its affiliates, that received PPP loans in an original principal amount of less than $2 million was automatically deemed to have made the required certification in good faith, but it is unclear whether that safe harbor will be applied to the second round of funding. Regulations carrying out the Act must be issued by the SBA within 10 days of the Act's enactment.
3. Simplified PPP Loan Forgiveness Application
The Act also creates a simplified forgiveness form for PPP loans of $150,000 or less, including those made during the first round of lending. Forgiveness will be granted if the recipient signs and submits to its lender a certification that is no more than one page, includes a description of the number of employees the recipient retained as a result of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. Recipients must retain records related to employment for four years and other records for three years. The SBA must create this form within 24 days after the Act's enactment.
4. PPP Loan Audits
Within 45 days of the Act, the SBA must submit to Congress an audit plan for conducting forgiveness rules and audits of PPP loans. This will be of interest to those borrowers who received a loan in excess of $2 million, and thus will be automatically subject to an SBA loan audit.
5. Entertainment Aid
Separate from the PPP program, $15 billion was earmarked for grants to live event operators or promoters, theatrical producers, live performing arts organization operators, cultural museums, movie theaters, and talent representatives. To receive a grant, the recipient must (among other requirements), have been fully operational on February 29, 2020, and have gross earned revenue during the first, second, third, or (with respect to applications submitted after January 1, 2021), fourth quarter of 2020 that demonstrates at least 25% percent reduction from the gross earned revenue during at least one of the same quarters in 2019. Entities that count in more than two of the following groups do not qualify for grants: publicly traded companies, multinational companies, companies that operate in more than 10 U.S. states, employ more than 500 full-time employees, or companies that receive at least 10% of its revenue from federal government sources.
6. Employment Implications
Under the Act, as of December 31, 2020, employers are no longer required to provide Emergency Paid Sick Leave or paid Emergency Family and Medical Leave under the Families First Coronavirus Response Act (FFCRA). However, covered employers can voluntarily provide this leave, and if they choose to do so, they can take the tax credit associated with this leave through March 31, 2021. With that said, all employers should still be mindful of other paid leave requirements under state and local laws, as well as their own paid leave and PTO policies. Many state and local governments enacted similar paid COVID-leave laws and ordinances to assist employees dealing with COVID-19, and while some of those laws also expire on December 31, 2020, some do not.
The Act also extends the Employee Retention Tax Credit—a refundable tax credit against certain employment taxes—to June 30, 2021 and increases the fully refundable portion of the qualified wages from 50% to 70%, meaning employers can receive a 70% credit on up to $10,000 of wages per employee per quarter.
We Can Help
Please contact Maslon's Corporate & Securities Group or Labor & Employment Group if you have questions or need assistance taking advantage of the relief provided under the Consolidated Appropriations Act, 2021.