The Consolidated Appropriations Act (CAA), 2021, passed December 27,
2020, updated the rules and processes for the Paycheck Protection Program (PPP). Since that law's passage in late December, the Treasury
Department, Internal Revenue Service, and Small Business Administration have
issued further guidance of the programs. Furthermore in late March, the
president signed The PPP Extension Act of
2021, extending the deadline to apply for PPP 1 and 2 from March
30 until May 31. Approximately $73 billion in PPP funding remained unspent at
the end of March, according to SBA data. This post highlights some of the PPP changes for 2021.
In general, PPP is an SBA-backed loan, issued by local lenders, to assist small businesses in replacing 2.5 months of payroll costs or replace owners compensation during the COVID-19 crisis.
Recalculation of 1st draw PPP loans or 1st time
application
A new provision (CAA, 2021,
Division N, Title III, Section 313) in the CAA allows Schedule F filing sole
proprietors, independent contractors, or self-employed individuals to
retroactively recalculate their PPP 1st draw loans based on their 2019 gross
income, instead of their 2019 net income. In March, SBA expanded who qualified
to use gross income to calculate their loans, now allowing sole proprietors, independent
contractors, self-employed individuals, single-member LLC and qualified joint
venture that file either a Schedule F or a Schedule C. However, if the
PPP loan had already been forgiven in 2020, there is an exception to
recalculating. In other words, small business owners may not recalculate PPP
1st draw loans that are already forgiven. Schedule C or F filers meeting the
new qualifications will also be allowed to use the gross income calculations
for PPP 2nd draw loans, too (2nd draw loans are described in the
next section of this post). Annualized maximums remain at $100,000 per employee
(CAA, 2021, Division N, Title II, Section 344). The annualized maximum applies
to the new gross income-based small business owner's compensation calculations
as well, with few exceptions. This means the maximum a sole proprietor without
employees could possibly receive for a 1st draw loan is $20,833.
The flow-chart below shows small
business owners how to determine if you qualify for new 1st draw PPP funds,
either via a first-time application or via a reapplication. If you are applying
for a first-time application of a 1st draw PPP, you may choose
whether to base your PPP calculation on 2019 income or 2020 income. The chart
is adapted from materials from the National Association of Farm Business
Analysis Specialists (NAFBAS) and used with their permission.
If you qualify, you need to contact your lender. If you wish to begin preparing your application, you can download the PPP 1st draw borrower application form 2483 to see the information that will be requested from you when you contact your lender. Schedule C filers use a separate form, 2483-C. Lenders may request applicants use a lender equivalent form instead of the SBA's form.
2nd draw PPP loans
In December, Congress
funded an additional $284.45 billion (CAA, 2021, Division N, Title III, Section
323) for a second round (or "2nd draw") of PPP for businesses with
300 employees or less (Section 343). Small business owners that already
received and appropriately spent down a first round of PPP may be eligible for
the second round of PPP under certain conditions. PPP 2nd draw loans are
available to applicants only if they experienced "at least a 25 percent
reduction in gross receipts in the first, second, third, [or fourth] quarter of
2020 relative to the same 2019 quarter " (CAA, 2021, Division N, Title
III, Section 311). For most borrowers, the maximum loan amount of a 2nd draw
PPP loan is 2.5x average monthly 2019 or 2020 payroll costs (or owner's compensation),
up to $2 million. For some borrowers, the maximum loan amount for a 2nd draw
PPP Loan is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million. The
3.5x average monthly payroll costs for the 2nd draw only applies to businesses
in the North American Industry Classification System (NAICS) code 72, the
accommodation and food services sector.
The flow-chart chart below
walks 1st draw PPP recipients through determining if they qualify for a 2nd
draw. The flow-chart also addresses the Employee Retention Credit (ERC), which
we discuss more in
another blog. This second chart is
adapted from materials from the National Association of Farm Business Analysis
Specialists (NAFBAS) and used with their permission.
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Before contacting your
lender, you may wish to begin preemptively preparing a sample application to
see the information that will be requested from you from your lender. You can
download the PPP borrower 2nd draw application form 2483-SD here. Schedule C filers use a separate form, 2483-C. Lenders may request applicants use a lender equivalent form
instead of the SBA's form. Applicants do have to certify on their SBA
application form 2348-SD (or lender equivalent) that, "current economic
uncertainty makes this loan request necessary to support the ongoing operations
of the applicant."
PPP tax treatment
The amount of your PPP loan
(forgiven or reasonably expected to be forgiven) has been non-taxable gross
income since PPP was created in the CARES Act last spring. However, the IRS
stepped in during summer 2020 and said because income associated with PPP was
tax-excluded they would not allow expenses associated with PPP to be deducted
on your 2020 federal taxes. At the end of 2020, Congress stepped in and usurped
the IRS's old interpretation and very clearly stated at the federal level PPP
expenses are tax-deductible (CAA, 2021, Division N, Title II, Section
276). For sole proprietors without employees, owner's compensation is
non-deductible to begin with, so the December law's treatment of PPP expenses
should not affect your expense deductions for the owner's compensation portion
of the loan. Furthermore, the new IRS tax treatment for 2020 PPP will also apply to PPP funds issued in 2021.
In our state, at the time of this blog's posting, the Minnesota Department of Revenue requires taxpayers to adjust their taxable state income for the amount of PPP forgiveness. Taxpayers adjust for this, as well as several other federal programs on the M1NC form. In summary, PPP forgiveness is non-taxable at the federal level and is taxable in the state of Minnesota.
For PPP borrowers that participate in income based subsidy programs, understanding how PPP affects their income can be important. For example, MNSure, the state of Minnesota's health insurance market, is a program that uses income levels to determine financial assistance credits for health insurance. MNSure bases its financial assistance on federal modified adjusted gross income (MAGI). Recall, PPP forgiveness amounts are not included as taxable income by the federal government.
PPP forgiveness
PPP borrowers must initiate an application to get their loan forgiven. PPP borrowers under $150,000 may use a simplified forgiveness process, which requires less documentation (CAA, 2021, Division N, Title III, Section 307). Many reading this blog fall into this smaller PPP loan category and will be able to utilize simplified forgiveness. Covered periods for loan forgiveness are at the borrower's discretion and may range from 8 to 24 weeks. SBA has detailed information on the forgiveness process, including SBA forgiveness forms, here. Lenders may choose not to use the SBA forgiveness forms and may offer a lender equivalent form instead. But looking at these SBA forms first at least offers guidance as to what information your lender may request.
This post is educational in nature and not legal, financial, or tax advice. PPP changes frequently and information may become out-of-date quickly.
