COVID-19 Legislation Expands PPP, Provides Income Tax Relief to Borrowers
On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, a $2.3 trillion spending bill that includes $900 billion in stimulus relief. President Trump is expected to sign the bill into law. This article provides a brief summary of key provisions of the Act impacting the Paycheck Protection Program (the “PPP”).
The Act, among other things, (1) allows borrowers to take a second PPP loan, (2) resolves income tax deduction issues, and (3) expands eligibility to Section 501(c)(6) organizations.
Second Draw: The Act appropriates over $280 billion to the PPP and allows small businesses to receive a second PPP if such borrower has less than 300 employees and can demonstrate a reduction in gross receipts of at least 25% compared to the prior year. Additional changes include: eligibility restrictions for businesses involved in lobbying or with connections to China; capping of loans at $2 million; and an expansion of eligible expenses, including certain business software of cloud computing, certain supplier costs, and personal protection equipment (PPE).
Income Tax: The Act provides that the forgiveness of PPP loans does not give rise to discharge of indebtedness income under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The Internal Revenue Service ruled earlier this year in Notice 2020-32 that a borrower could not take a deduction for an expense that would otherwise be deductible “if the payment of the expense results in forgiveness of a covered loan.” This frustrated many borrowers of PPP loans that had previously considered such loans, if forgiven, to be without adverse tax consequences. The Act, among other things, rectifies this problem by providing that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” provided in the CARES Act.
Eligibility: The Act expands PPP eligibility to Section 501(c)(6) organizations, conditioned on: the organization not receiving more than 15% of its receipts from lobbying; lobbying activities not comprising more than 15% of the total activities of the organization; the cost of lobbying activities of the organization not exceeding $1,000,000 during the most recent tax year; and the organization employing not more than 300 employees.
The Act also provides the following, as relates to the PPP:
- Special maximum loan calculations for accommodations and food service businesses;
- Expanded hold harmless provisions for lenders; and
- Changes to the calculation for forgiveness, allowing borrowers to disregard any advance from the Economic Injury Disaster Loan program.
This article provides a high level overview of the Act and is subject to the language of the Act itself. When analyzing eligibility, compliance, or other issues related to PPP loans, both lenders and borrowers should ensure they have consulted the proper sources. If you have any questions regarding the SBA PPP loans, or other aspects of the CARES Act, please contact a Baird Holm LLP attorney.