The President signed the $900 billion COVID-19 relief bill into law on Dec. 27, 2020, known as the Consolidated Appropriations Act (the Act). At over 5,500 pages, the bill is massive (for comparison, the $2 trillion Coronavirus Aid, Relief, and Economic Security [CARES] Act passed in March was 335 pages), but it contains important updates for the Paycheck Protection Program (PPP) and other federal lending programs designed for organizations hard hit by the pandemic. Of the $900 billion of the stimulus package, $284 billion is allocated for additional PPP loans (PPP2), $20 billion of Emergency Injury Disaster Loans (EIDLs) to businesses in low-income communities, and $15 billion for certain live venues, independent movie theaters and cultural institutions.

Summaries of portions of the relief bill that affect PPP loans are as follows:

PPP2 for previous PPP recipients: PPP1 borrowers may apply for a PPP2 loan of up to $2 million, but must meet the following rules:

• Have 300 or fewer employees.
• Have used or will use all of their first PPP loan funds.
• Be able to show at least a 25% decline in gross revenue for any 2020 quarter compared with the same quarter in 2019.

PPP2 for first time PPP borrowers: PP2 borrowers must meet the following rules:

• Have 500 or fewer employees that are eligible for other SBA 7(a) loans.
• Be sole proprietors, independent contractors, and eligible self-employed individuals.
• Be not-for-profits, including religious institutions.
• Be accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.

PPP Borrowers that Returned Previous PPP Loans: The bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.

PPP2 Loan Terms: Terms for granting these loans are similar to PPP 1 – PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to a $2 million maximum. Maximum is $10 million for affiliated entities.

Hospitality Sector: PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.

EXPANDED LIST OF ELIGIBLE BORROWERS

Expanded categories of borrowers includes broadcast news stations, newspapers, and public broadcasting services; 501(c)(6) not-for-profit organizations; “destination marketing” entities; and housing cooperatives.

Section 501(c)(6) organizations are not-for-profit entities defined by the IRS as business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues.  A “business league” can be any “association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. The Act does, however, exclude “professional sports leagues” and political campaign organizations from this broad category (and thus from qualification for PPP funding) and also excludes any of the remaining organizations if they engaged in lobbying activity that constitutes more than 15% of their activity or produces more than 15% of their receipts.

Destination marketing organizations include both what the name seems to imply—not-for-profit entities (and state or local government entities) that promote tourism—and less obviously a not-for profit entity “that is engaged in, and derives the majority of” its operating budget from revenue “attributable to providing live events.” Like eligible 501(c)(6) organizations, the size of such organizations is capped at 300 or fewer employees, and the same limitations on lobbying activity and revenues apply.

Other than news organizations, which have a 500 employee limit, these other new categories are limited to 300 employees.

Restricted borrowers include the same industries that were restricted previously from PPP loan (see full listing on final page).

NEW RESTRICTED BORROWER CATEGORIES

• Publicly traded companies
• Lobbying organizations
• Companies organized in or with significant operations in China or Hong Kong, and companies with board members who are residents of China

PPP2 LOAN TERMS – ADDITIONAL ELIGIBLE EXPENSES:

The costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities.

PPP2 also makes the following potentially forgivable:

• Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
• Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
• Covered operating costs such as software and cloud computing services and accounting needs.
• The relief act also clarifies that borrowers can include group benefit insurance (dental, vision, life, disability) as payroll costs in their calculations. Importantly, these expanded expense categories are valid for both existing and new PPP loans.

To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a Covered Period of either eight or 24 weeks — the same parameters as PPP1.

PPP LOAN FORGIVENESS APPLICATION/CALCULATION SIMPLIFICATION:

For loans of $150,000 or less, the borrower will complete a one-page loan forgiveness application, and the borrower will not be required to submit supporting documentation but will be required to maintain it on file.

Borrowers no longer will deduct their EIDL advance from their PPP forgiveness amount.

AUDITS AND LOAN NECESSITY FORM 3509

There is some discussion of clarification of audit objectives and procedures for loans of more than $2 million. There is no mention of clarification of the Loan Necessity Form 3509 for borrowers of more than $2 million.

CLARIFICATION OF TAX DEDUCTIBILITY OF PPP EXPENSES

The CARES Act implies that forgiveness of a PPP loan is non-taxable. While the terminology was inconsistent at times, wavering from forgiveness of indebtedness to exclude from gross income, the CARES Act and subsequent guidance reiterated that forgiveness will not create a taxable event. This Act reaffirms this position.

The CARES Act has stated that the forgiveness of a PPP loan in non-taxable. In the last year there’s been some ambiguity about the intent with some interpretations wavering between forgiveness of indebtedness to exclusion of forgiveness from gross income. This subsequent guidance in the text of the Act affirms the position the forgiveness will not create a taxable event.

As to PPP Covered Expenses, the IRS in its Notice 2020-32 indicated that a borrower cannot deduct expenses with funds that create non-taxable income. The IRS they also came out with issuance of Revenue Ruling 2020-27 affirming this position if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan by the end of such taxable year. The relief act now states that “no deductions shall be denied or reduced…by reason of the exclusion from gross income.  In other words, the expenses are deductible.

APPENDIX

PPP2 Restricted Borrowers

a. Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);

b. Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111);

c. Life insurance companies;

d. Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);

e. Pyramid sale distribution plans;

f. Businesses deriving more than one-third of gross annual revenue from legal gambling activities;

g. Businesses engaged in any illegal activity;

(i) Private clubs and businesses which limit the number of memberships for reasons other than capacity;

h. Government-owned entities (except for businesses owned or controlled by a Native American tribe);

i. Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;

j. Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;

k. Businesses in which the Lender or CDC (Community Development Corporation), or any of its Associates owns an equity interest;

l. Businesses which:

(1) Present live performances of a prurient sexual nature; or

(2) Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;

m. Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a

loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss;

n. Businesses primarily engaged in political or lobbying activities; and

o. Speculative businesses (such as oil wildcatting).

This summary was drafted by CBIZ. If you have any questions, please email Eric Seaman ESeaman@CBIZ.com