On December 21, Congress passed a $900 billion COVID-19 relief bill that allocates roughly $284 billion for the Paycheck Protection Program (PPP), a continued initiative designed to provide a direct incentive for small businesses to keep their workers on payroll. Congress created the PPP at the beginning of the COVID-19 crisis and the loans expired on August 8, 2020. President Trump signed the new COVID-19 relief bill into law on December 27.

Small businesses with 300 employees or less – down from the original 500 employee maximum in the first round – may submit an application to the Small Business Administration (SBA) for a PPP loan. Loans are limited to $2 million per business.

The SBA will calculate loan amounts by taking average monthly payroll in 2019 and multiplying by 2.5. For instance, if average monthly payroll was $500,000, a small business could qualify for a $1,250,000 loan. A special calculation is available for restaurants and food businesses of 3.5 times monthly payroll. Small businesses must have already used or plan to use their original PPP funding. They may use the loan proceeds over a period of 24 weeks for payroll, rent, and mortgage expenses. The new bill adds new expenses to “qualifying expenses,” e.g., operating expenses and workplace protection costs related to COVID-19. [1]

Small businesses must document that they experienced a 25 percent loss of revenue to qualify. This requirement is more stringent than the original PPP, which simply required the small business to represent that economic uncertainty made the PPP loan necessary. “Under the 25 [percent] loss-of-revenue test, small businesses must compare their 2020 quarterly revenue (aka,gross receipts) against their 1st, 2nd, and 3rd quarters of revenue in 2019.” The borrower must demonstrate a loss of revenue of “. . . 25 [percent] or more from at least one quarter of 2020 as compared to that same quarter in 2019.” [2]

The new round of loans are eligible for forgiveness under the 60 percent payroll rule. This rule requires that small businesses spend 60 percent or more of the loan on payroll costs.

In contrast to ambiguity regarding the original PPP loans, the new loans will not be taxable when forgiven. The Act amended Section 7A(i) of the Small Business Act to provide that no deduction shall be denied by reason of the exclusion of the PPP loan forgiveness from gross income. This overrides the IRS’s previous position in Notice 2020-32 which indicated that such expenses would be disallowed. The Act also makes clear that the amount of the loan forgiveness will be treated as tax-exempt by a partner or S corporation, thus increasing the partner’s or shareholder’s basis in the entity.

Finally, the new law provides a simplified loan forgiveness application for loans less than $150,000. The previous bill had authorized this application only for loans less than $50,000. The new legislation mandates the SBA to create a simplified PPP forgiveness application. “The simplified application must fit on one page and will include loan information as well as a certification from the business owner that the funds were used properly and are eligible for forgiveness but will not include calculations or other additional information.” [3]

[1] See Sorensen, Matt, “New Stimulus Bill Includes Second Round of PPP Loans for Small Business and Forgiveness Rule Changes Favorable to Borrowers,” Entrepreneur, December 22, 2020, <https://www.entrepreneur.com/article/362143>

[2] See Sorensen, Matt, “New Stimulus Bill Includes Second Round of PPP Loans for Small Business and Forgiveness Rule Changes Favorable to Borrowers,” Entrepreneur, December 22, 2020, <https://www.entrepreneur.com/article/362143>

[3] See Sorensen, Matt, “New Stimulus Bill Includes Second Round of PPP Loans for Small Business and Forgiveness Rule Changes Favorable to Borrowers,” Entrepreneur, December 22, 2020, <https://www.entrepreneur.com/article/362143>