OverviewThe Consolidated Appropriations Act of 2021 (referred to as the "COVID-19 Relief Bill" or "Act") signed into law by the president on December 27, 2020, is the latest round of stimulus legislation. With more than 5,000 pages, the Act may be the largest piece of legislation ever passed. As such, it will take considerable time to sort through the legislation’s provisions and relief measures.
While there are many key provisions under this omnibus legislation that are designed to provide much-needed relief to small businesses, many of them are in fact legislative efforts to revamp the Paycheck Protection Program ("PPP"). The COVID-19 Relief Bill provides $284 billion to the U.S. Small Business Administration ("SBA") for both first- and second-draw PPP forgivable small business loans. It also allocates $20 billion to provide Economic Injury Disaster Loan ("EIDL") grants to businesses in low-income communities.
On January 6, 2021, the SBA issued initial guidance on the PPP-related changes introduced by the COVID-19 Relief Bill. This guidance is in the form of the following two interim final rules ("IFRs"):
Business Loan Program Temporary Changes: Paycheck Protection Program as Amended by Economic Aid Act
This IFR incorporates the changes to PPP requirements made by the COVID-19 Relief Bill and consolidates and restates prior interim final rules related to the program.
Business Loan Program Temporary Changes: Paycheck Protection Program Second-Draw Loans
This IFR addresses second-draw PPP loans to businesses that previously received a PPP loan.
PPP-Related Provisions of the COVID-19 Relief BillA significant provision is the clarification that business expenses paid with forgiven PPP loans are tax-deductible for federal tax purposes. This supersedes the November 2020 guidance in Revenue Ruling 2020-27, in which the IRS had concluded that expenses paid with PPP loan proceeds were not deductible if the loan was forgiven or if at the end of the tax year the taxpayer had a reasonable expectation that the loan would be forgiven. The COVID-19 Relief Bill brings the tax-deductibility issue in line with Congress’s intent when it created the original PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
While this is good news overall, tax practitioners need to tread carefully as state conformity issues remain. For example, California does not conform to this federal law and taxpayers will still need to reduce their deductions on their California returns.1
Therefore, it is critical to consider applicable state conformity issues and where appropriate, reduce business expenses by the amount of the PPP loan forgiveness.
Additional highlights of key provisions of this legislative stimulus package to revamp the PPP include:
- New round of funding for first-time PPP borrowers
Eligible small businesses who did not receive a PPP loan in the first round of funding before that program expired on August 8, 2020, will again have an opportunity to apply for a PPP loan. PPP loans for new applicants are expected to be subject to many of the program rules in place in the two initial rounds of funding. Subject to availability of funds, PPP loans will be available through March 31, 2021.
- Second draw of PPP loans for eligible small businesses
Small businesses that previously received a PPP loan may be eligible for a second-draw PPP loan if the business has used all of its first-round PPP funds. Second-draw PPP loans cannot exceed $2,000,000 and are limited to small businesses with 300 or fewer employees and that can demonstrate a loss of 25% of gross receipts in any quarter during 2020 when compared to the same 2019 quarter.
- Expansion of eligible and forgivable expenses
In addition to payroll, rent, utilities, and interest on mortgages that are permitted expenses under the CARES Act, the COVID-19 Relief Bill allows for small businesses to use PPP proceeds for additional expenses such as personal protective equipment for employees; costs associated with outdoor dining; supplier costs; costs associated with software and cloud computing; other human resources and accounting needs; and property damage costs due to public disturbances that occurred during 2020 that are not covered by insurance.
- Greater flexibility with the loan forgiveness covered period
The COVID-19 Relief Bill changed the loan forgiveness covered period from either an 8- or 24-week period to a covered period between 8 and 24 weeks at the election of the PPP borrower.
- A simplified forgiveness process for PPP loans under $150,000
Under the terms of the COVID-19 Relief Bill, the SBA is to create a simplified application form within 24 days of the bill’s enactment date.
- PPP loan recipients will be allowed to claim the Employee Retention Credit
Under the CARES Act, a business that took a PPP loan did NOT qualify for the Employee Retention Credit, which was a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
- A repeal of the provision under the CARES Act that reduced PPP forgiveness by the amount of any EIDL advances
The Paycheck Protection Program has already gone through several significant updates and changes since its inception in March 2020. From a small business perspective, the COVID-19 Relief Bill provides increased PPP funding and eligibility to small businesses hit hard by the impacts of COVID-19. However, with increased funding and eligibility comes added complexity, as many of the new PPP provisions are nuanced and contain exceptions or modifications applicable only to certain types of small businesses. As such, the SBA will need to issue new forms, as well as provide further guidance and clarification on many aspects of the Act’s PPP-related provisions.
In addition to the PPP-related changes, the COVID-19 Relief Bill contains a multitude of tax provisions designed to provide added relief to small businesses that are beyond the scope of this communication.
Risk Management GuidanceCAMICO recognizes that the accounting profession continues to face unique challenges as CPA firms are perceived as the "front line" for assisting business clients with navigating and addressing the application of many of the economic and tax relief measures in this latest round of stimulus legislation. The ongoing challenge for CPA firms, of course, is how to do so when the information and rules related to the application and/or qualifications for many of the economic and tax relief measures are constantly changing. In addition, as some of the relief measures being presented are outside of the scope and expertise of accounting firms, what, if anything, should a firm do without exposing the firm to potential liability risk?
From CAMICO’s risk management perspective, DOCUMENTATION remains critical to minimizing risk and avoiding potential client expectation gaps. To assist firms with navigating the challenges with this latest round of legislative efforts, CAMICO has developed the following risk management tools to help firms be prepared to provide information and services to their clients specific to the COVID-19 Relief Bill while proactively minimizing potential exposures.
Engagement letter template:
Consolidated Appropriations Act of 2021—Assistance with New Round of PPP Funding
Business client communication letter:
Includes key highlights of the PPP-related provisions under the Consolidated Appropriations Act of 2021
For CAMICO PolicyholdersAdditional risk management information regarding the Paycheck Protection Program can be found on CAMICO's COVID-19 Resource Page, which is available on our Members-Only Site at www.camico.com. Please visit our Members-Only Site often for updates, as we will share new information as it becomes available.
1 California enacted AB 1577 (Ch. 20-39), which specifically prohibits taxpayers from claiming any deductions or credits for expenses paid with forgiven PPP loan proceeds.