By: Jessica A. Distel, CPA, MBA | Director of Tax and Business Services
At the end of 2020, Congress passed, and President Trump signed a new law that provides for additional relief related to the coronavirus pandemic. This law, the Consolidated Appropriations Act 2021 (CAA 2021), includes a second draw of Paycheck Protection Program (PPP) loans (PPP Second Draw Loans), as well as an expansion and extension of the Employee Retention Credit.
It is helpful to recall that in March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act authorized the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP which provided assistance through 100% federally guaranteed loans (Original PPP Loans) to eligible recipients. Taxpayers could apply to have the loans forgiven to the extent their proceeds were used to maintain payroll during the COVID-19 pandemic and to cover certain other expenses.
The new CAA 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP Second Draw Loan of up to $2 million. To qualify for a PPP Second Draw Loan, a taxpayer must have taken out an Original PPP Loan. In addition, prior PPP borrowers must meet the following conditions to be eligible for the PPP Second Draw Loans:
- 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 Jan. 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.
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 in calendar year 2019. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Like Original PPP loans, PPP Second Draw Loans may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest, and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income.
The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. IRS took the position that these expenses were nondeductible. However, the CAA 2021 provides that expenses paid both from the proceeds of loans under Original PPP loans and PPP Second Draw Loans are deductible.
Another significant impact of the CAA 2021 was the expansion and extension of the Employee Retention Credit (ERC). Under the CARES Act, qualified employers were able to claim a credit of 50% on employee qualified wages paid from March 13, 2020, through December 31, 2020. The maximum eligible wages were $10,000 per employee which resulted in a credit of up to $5,000 per employee; however, employers were not eligible for the credit if they received a PPP loan.
Other qualifications for the credit included:
- The employer must have been in business during 2020 and
- The business either:
(a) Was fully or partially suspended due to orders from a governmental authority due to the coronavirus pandemic or
(b) Had a reduction in gross receipts of at least 50% when comparing a quarter in 2020 to the same quarter in 2019
Per the CAA 2021, employers that qualify for the ERC can now claim the credit, even if they received or will receive a PPP loan, so long as the ERC and PPP forgiveness are not claimed for the same wages.
Because this change is retroactive, we recommend that small businesses determine if they are eligible for the ERC before applying for PPP forgiveness on the first draw, as we are still waiting for guidance on the integration of these two items.
The ERC was also extended through June 30, 2021. For the period January 1 ,2021, to through June 30, 2021, the eligibility has changed as follows:
- The gross receipts during first or second quarter in 2021 would need to be at least 20% less than the gross receipts of the same quarter in 2019
- The employee limit of $10,000 of eligible wages is per quarter, instead of the entire year
- The credit calculation has increased from 50% to 70%, meaning the total credit per employee is $7,000 per quarter (or $14,000 per employee for 2021)
While this is an area we will patiently wait for further guidance, we do have enough information for our small business clients to consider if this may be a credit they are eligible for.
Please contact one of our team members at Buckingham Advisors if you have further questions or need assistance.