Alright, my friends…it’s been just a wee six months, but the federal government has finally passed a $325 billion round of small business stimulus. Below is what we know so far.
When the SBA issues their guidance on how Second Draw PPP and reinstatements will be administered, I’ll send another update.
Changes to Forgiveness
If you have not yet applied for Round 1 forgiveness, most of you should have a much easier path.
EIDL Advance: First, the ridiculous EIDL Advance exemption has been repealed. Any EIDL Advance will not be deducted from your forgiveness eligibility. So that’s $1,000 – $10,000 that you don’t have to pay back from Round 1. If you already paid it back, ask your lender to return the funds.
Simplified forgiveness to $150,000: Remember when I advised you to wait to apply for forgiveness? Win for you. Form 3508S — a simplified, one-page form asking you to simply attest to your proper use of PPP funds — can now be used for loan amounts up to $150,000. (Use was previously capped at $50,000.) Please note, you need to use the form provided by your lender. The form above is for reference only. Check in with your lender on whether this is ready for you to use.
Use of funds deadline: Note, if you got your loan after July 15 and elected the 24-week use period, you have until December 31, 2020 to use all the funds. This deadline has not been extended. However, a bunch of new categories will be considered retroactively for your 40% nonpayroll portion. Check that you’ve used your full allocation of Round 1 funds, as this is a condition for accessing Round 2.
Forgiveness over $150,000: If your loan was over $150,000, more categories will be considered retroactively for forgiveness of the 40% nonpayroll amount. If your loan was under $2 million, you can use the more simplified EZ application. More below.
Corporate meals & entertainment is back: The Donald taketh away, then the Donald giveth back. Remember when the 2017 tax bill eliminated the deduction for corporate entertainment? Well, that’s over. You may now deduct 100% of your client meals and entertainment expenses, effective for the next five years. Pandemic drinking lunches are now IRS-approved.
PPP2 or “Second Draw” Loans
Congress has allocated $284 billion for a second round of Paycheck Protection Program loans. Just like the first time, the SBA will administer this program through private lenders. The SBA has 10 days to advise us on the criteria and administration. Here’s what we know today.
I’ll note right up front: if you qualified for Round 1 and took less than your full allocation, or returned unused funds before the May safe harbor deadline, you can apply to have the full Round 1 approved amount reinstated with your previous lender. That’s before any PPP2 considerations. Rarely does government give us a do-over, but you get one.
PPP2 qualifying factors:
Full use of accepted Round 1 PPP by 12/31300 employees or lessReduction in gross receipts (gross revenue) by at least 25% YOY in Q1, Q2, or Q3 of 2020 (or Q4 if you apply after 1/1/21)
Remember how I said it was important to close your books? If you did that, you’re in great shape. Compare your 2019 and 2020 gross revenue by quarter. If any comparable quarter shows gross revenue reduced by 25% or more, you can apply for PPP2. And, you have your documentation ready.
Gross revenue is the first thing at the top of your income statement. It’s revenue before we take out any COGS or expenses. Purely the money you received for sales in that quarter.
Maximum loan:
2.5x payroll unless you’re in NAICS categories starting with 72 (accommodations & food service), which get 3.5x payroll per location with <300 employees$2 million cap
60% of funds must still be spent on payroll over a maximum of 24 weeks. And note that if your loan is more than $150,000, your forgiveness will be impacted if you reduce headcount permanently by more than 25%.
However, the new bill gives far more flexibility on qualified uses for the 40% nonpayroll expenses, retroactively to Round 1, including:
Operating expenses like software, cloud services, delivery costs, payroll, HR, sales functions, and accountingEssential supplier costsPPE and testing costs for employeesBusiness modifications like outdoor dining areas and drive-up deliveryProperty damage due to civil unrest
Employee benefits, rent, mortgage interest, and other Round 1 expense types are still included.
Note that these new spending categories will be considered retroactively when you apply for PPP Round 1 forgiveness. So if you just couldn’t quite get there and your loan was over $150,000, revisit your use of funds for new qualifying expenditures.
All other rules from Congress’ June 2020 Paycheck Protection Flexibility Act still apply.
New PPP Category Reserves
The new bill carves out a few pockets of money and new eligibility:
Micro businesses: $15 billion set aside for first- or second-time applicants with fewer than 10 employees.Community lenders: $15 billion set aside for allocation by community lenders.Newly eligible: chambers of commerce, business leagues, and visitors’ bureaus with fewer than 300 employees that receive less than 15% of their receipts or $1 million from lobbying activities; not-for-profits including churches.More for food service & accommodations: 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.
New PPP Tax Exemptions
The IRS guidance up to this point was that wages and expenses paid with PPP funds would not be treated as qualified tax expenses. This bill overrides the IRS. Your forgiven PPP business expenses from 2020 are now qualified as tax-exempt, and that’s protected by law. This should make life easier for your tax accountant.
Any Second Draw loans achieving forgiveness will have the same tax-exempt status for qualified business expenses. You should still track them in separate accounts, however, just in case you are subject to future audit.
Mandatory FFCRA Expires
If you have employees, you were likely subject to the mandatory FFCRA. Although the mandate expires on December 31, 2020, Congress has extended the eligible tax credits. Should you voluntarily extend the benefit through March 31, 2021, you can continue to apply for tax credits.
This applies to the federal mandate only. Check your state law for surviving COVID-related mandates.
Unemployment Benefits
All federal emergency unemployment programs have been extended by 11 weeks, including the PUA for gig workers and the self-employed. The program will now be available until March 14.
The extended benefit includes your state benefit +$300 per week across all programs.
The original programs expired on December 26, and the president signed the new bill on December 27. Given the lapse, you may need to re-apply in your state for the extended program.
Direct Personal Benefits
This is the much-debated “stimulus check.” It’s entirely based on your household’s adjusted gross income (AGI), which will include your business earnings if you’re a passthru entity.
If your AGI for 2020 is below $150,000 married, $112,500 head of household, or $75,000 single, you will qualify for $600 each for you and any dependent children 16 or under. (Older child dependents and adult dependents living with you will not qualify.) Payments phase out by $5 per additional $100 of income.
January 2021 payments will be based on the AGI from your most recent tax return. If you didn’t qualify for the April stimulus check, you won’t get this auto-distribution. However, if you experienced a loss of income in 2020 and your AGI is in range, you can receive both stimulus rounds by claiming the Recovery Rebate Credit on your 2020 tax returns. Note that AGI excludes your tax-deferred contributions to retirement programs.
Other Programs
Extended EIDL loans – this program has been extended through March 31, 2021 with another $20 billion to lend. Total loan amounts are still capped at $150,000. If you’re not eligible for the new stimulus and you want some backup, apply as soon as possible, before they require 2020 closed books.New California grant programs – California continues to provide new small business credits, tax breaks, and grants, including a new $25k grant program beginning 12/30. If you incorporated this year, your $800 minimum franchise tax has been waived. There’a new hiring credit from December 1, plus new iBank loan allocations for underserved communities. Check out the state’s Small Business Fact Sheet for a summary of active programs.
I know, it’s a lot. It’s a 5,590-page bill. I hope this summary helps you get organized for forgiveness, new applications, and personal income planning.
