At the end of 2020 a new law was passed that provides for additional relief related to the COVID-19 pandemic. The Consolidated Appropriations Act 2021(CAA,2021) includes a second draw of PPP loans. It also allows businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans.
PPP Second Draw Loans
The CAA 2021 permits smaller businesses that received a PPP loan and experienced a 25% reduction in gross receipts to take a "Second Draw" loan of up to $2 million. Eligible Entities:
Employ no more than 300 employees per physical location.
Have used or will use the full amount of their first PPP loan.
Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are
eligible to utilize the gross receipts from 4h quarter 2020. Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veteran organizations, tribal businesses, self-employed individuals, independent contractors, and small agricultural co-operatives. Loan Terms: Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or calendar year. However, borrowers in the hospitality or food industry (NAICS 72) may receive PPP Second Draw Loans up to 3.5 times average monthly payroll costs. Gross Receipts and Simplified Certification of Revenue Test: Loans of no more than $150,000 may submit a certification, on or before the date of the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Non-profits and veteran organizations may use gross receipts to calculate their revenue loss standard. Loan Forgiveness: Like the first PPP loan, the Second Draw Loan may be forgiven for payroll costs of up to 60% and non payroll costs such as rent, mortgage interest, and utilities of 40%. Forgiveness is not included in income as cancellation of indebtedness income. Application of Exemption Based On Employee Availability: CCA 2021 extends the current safe harbors on restoring full-time employees and salaries and wages.
Deductibility of Expenses Paid By PPP Loans
The CARES ACT was silent on whether expenses paid with PPP loan proceeds could be deducted. IRS, then, took the position that these expenses were nondeductible. CCA 2021 provides that expenses paid both from the proceeds of loans under the original PPP and the Second Draw Loans are deductible.
Please contact our office with any questions you might have.