What You Need to Know about the New Stimulus Package
On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021, which provided much-awaited stimulus funding in response to the global pandemic arising out of the novel coronavirus (“COVID-19”). While the full text of the law is more than 5,500 pages and includes the federal government’s omnibus spending bill, this alert gives an overview of provisions that are relevant for self-employed individuals, businesses, and organizations who have received stimulus benefits in 2020 and/or who may seek additional benefits in 2021.
In addition to the $600 individual payments going to adults within certain income limits, Congress has renewed the widely popular Paycheck Protection Program (“PPP”) loan program through which self-employed individuals, businesses, and organizations can access potentially forgivable loans to cover payroll and certain business expenses, funding another $285 billion of additional loans. The new law also includes $300 weekly federal contributions to state unemployment benefits, and extends the Families First Coronavirus Response Act (“FFCRA”) which provides for paid sick and family leave for employers who voluntarily elect to continue it.
Paycheck Protection Program Changes
As part of this latest round of stimulus funding, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act, renews the PPP with several key differences from the original loan program, including amending certain aspects of the original program that engendered some criticism. The following are some key upshots and changes:
Existing (and First-Time) PPP Borrowers
For borrowers who received PPP loans earlier this year, there are several retroactive changes in the new law that may affect your forgiveness calculation and may allow more forgivable expenses. In addition, these retroactive modifications should permit first-time borrowers to access the program. If possible, we recommend that borrowers wait until after the Small Business Administration (“SBA”) issues regulations before applying for forgiveness.
- Eligible Expenses: PPP funds in the original round of funding were designed to primarily fund payroll in an effort to keep workers engaged through the pandemic, but could also be used to cover other eligible expenses including rent, utilities, and mortgage interest, in order to obtain forgiveness. If you did not accept or you returned some or all of the eligible loan proceeds for which you were approved and have not yet received forgiveness, the new law permits borrowers to increase the original loan amount based on these new eligible expenditures. Congress has now expanded the list to include the following additional forgivable expenses:
- Covered Operations Expenditures: Rent and utilities have been expanded to “operations expenditures,” which include “business software or cloud computing service that facilitates business operations, product, or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”;
- Covered Property Damage Costs: A cost or damage relating to vandalism or looting due to public disturbances that occurred in 2020 that was not covered by insurance;
- Covered Supplier Costs: An expenditure to a supplier of goods “essential to the operations of the entity” and pursuant to a contract or purchase order in effect before the covered period; and
- Covered Worker Protection Expenditures: Expenses for modification of the premises or activities to comply with guidance from public health authorities or OSHA (such as renovations for a drive-through window, outdoor dining facilities, physical barriers such as plexiglass, screening tools, personal protective equipment (“PPE”) as enumerated in the regulations, but not including residential real property or intangible property.
- Covered Period: PPP loans must be used for expenditures within the “covered period.” A “covered period” was the 24 weeks after the loan was disbursed (or an 8-week period if the borrowers received loans before June 5, 2020, and elected the 8-week covered period). Now, Congress has allowed all borrowers—not just second-draw PPP recipients—to choose their covered period for forgiveness, provided that it is longer than 8 weeks but shorter than 24 weeks from the date of disbursement of the loan. If you have not yet applied for forgiveness, you should review your covered period to elect the period to maximize your forgiveness eligibility.
- Simplified Forgiveness Application: For any loan under $150,000, forgiveness applications shall consist of a simplified, one-page certification.
- Deductibility of Expenses Paid for with Forgiven PPP Loans: One of the most controversial aspects to the original PPP program was that, while the CARES Act specified that forgiven PPP funds would not be taxed as income, the IRS subsequently issued guidance stating that expenses paid for with forgiven PPP funds would not be deductible, thereby creating a taxable effect to the original program. The new law overrides this prior guidance and provides that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied,” by reason of the CARES Act’s exclusion of forgivable PPP loans from income.
- EIDL Advances No Longer Need to Be Deducted from PPP Loan Forgiveness. The new law repeals a provision in the CARES Act that required EIDL advances of $10,000, which need not be repaid, to be deducted from the total amount of PPP loan forgiveness.
Second-Draw PPP Loans
If you have already received and used a PPP loan, there are new, more restrictive eligibility criteria set forth in the Consolidated Appropriates Act of 2021 that would allow certain borrowers to receive a second PPP loan. In general, the following provisions—including several new restrictions—are intended to apply only to such “second-draw” loans:
- Second-Draw Loans. Even if you applied for and received a PPP loan in 2020, you may be eligible to receive a second loan, but there are strings attached:
- Demonstrating Loss. While in the original PPP round, a borrower needed only to certify that current economic uncertainty made a loan request necessary to support ongoing operations, to obtain a second draw, the borrower must demonstrate at least a 25 percent reduction in gross receipts during any completed quarter in 2020, compared to the same quarter in 2019.
- Size Reduction. The new law reduces the definition of eligible businesses who may apply for a second-draw loan from 500 employees (which could be increased according to SBA’s size standards) to a hard cap of 300 employees. Additionally, the new law reduces the maximum number of employees at any one physical location from 500 to 300, for chain restaurants and hotels, while still permitting such hospitality chains (designated as NAICS 72) to receive second-draw loans.
- Certain Companies Prohibited. In addition to existing prohibitions, publicly traded companies, entities primarily engaged in political or lobbying activities, and certain companies with ties to the Peoples Republic of China or Hong Kong are prohibited from applying for this new version of the PPP program.
- Maximum Loan Amount. In the first PPP Program, borrowers were eligible to borrow 2.5 times their average monthly payroll costs, up to a maximum of $10 million. While keeping the same average monthly payroll calculation, Congress has reduced the maximum second-draw loan amount to $2 million.
If you have not yet received a PPP loan, when the program reopens you may be able to apply for the first time (see the above explanation of retroactive changes that will affect your application). The SBA has 10 days to write regulations implementing this latest round of PPP after the bill is signed into law, after which the program will open and run through March 31, 2021.
Families First Coronavirus Response Act Now Voluntary
Under the original FFCRA, Congress mandated employers to provide two weeks of Emergency Paid Sick Leave (“EPSL”) and twelve weeks of Expanded Family and Medical Leave (“EFML”). The new law no longer mandates the sick leave or child care leave, but instead allows employers to voluntarily offer this leave and receive a dollar-for-dollar tax credit for all leave taken under this program through March 31, 2021. Beginning January 1, 2021, providing FFCRA leave does not mandate job-protection. However, the law does not provide a new bank of leave for tax credit or eligibility purposes, and many employees have exhausted their available leave.
Employee Retention Tax Credit Now Available for PPP Recipients
The new stimulus package also makes available one of the aspects of the CARES Act that we believe has been underused and received too little attention: The Employee Retention Tax Credit.
- Businesses who can show a significant decline in gross receipts or who were shut down for a period of time after March 12, 2020, but continued to pay employees’ wages or health insurance, may now access this payroll tax credit tied to wages actually paid to employees (worth up to $5,000 per employee in 2020, and up to $14,000 per employee in 2021) even though they also received a PPP loan. However, the tax credit may not be sought for wages for which the business is also seeking PPP loan forgiveness (e. businesses cannot “double dip” for the same wages). Additionally, many of the most favorable changes to the program are only in effect for the first half of 2021.
- In addition to retroactively extending the tax credit to PPP loan recipients, whom the CARES Act previously excluded, the new law also expands it through June 30, 2021; raises the total amount, and percentage, of tax credits that can be sought in 2021; and expands eligibility to businesses who can demonstrate a reduction of 20% in gross receipts during the first half of 2021, rather than the earlier required 50% reduction.
- For businesses with more than 100 employees, the Employee Retention Tax Credit was previously limited to periods of actual shutdown or when employees were not able to work. Now for the first two quarters of 2021, that limitation has been lifted for employers with 500 or fewer employees, making the tax credit more appealing to larger employers.
Stay tuned for further updates on how the recent changes will be implemented, which we expect from SBA. This body of legislation is rapidly changing as Congress and the SBA work to issue further regulations. We will update you as further guidance and details on how these changes will be administered becomes available.