Blogs

 By Marty McCarthy, CPA, CCIFP of McCarthy & Company
Published January 7, 2021

Be sure to check out the NASBP Virtual Seminar that features McCarthy's insights and tips into construction accounting and financial statements for 2021.     


The U.S. Small Business Administration (SBA) and Treasury issued guidance late Wednesday night for the reconstituted Paycheck Protection Program (PPP).

The guidance came in the form of two interim final rules (IFRs).

1. The 82-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” consolidates the rules for PPP forgivable loans for first-time borrowers and outlines changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260.
2. The 42-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” lays out the guidelines for new PPP loans to businesses that previously received a PPP loan.

This alert addresses the first IFR for first time borrowers.

PPP2 Overview

Congress revived the PPP as part of the $900 billion Consolidated Appropriations Act of 2021that was signed into law on December 27. The program provided $525 billion in forgivable loans over five months before it stopped accepting applications in August. The Economic Aid Act rebooted PPP (or PPP2) with many of the same parameters as the first program but also several important differences from the original PPP.

One of the biggest changes is making PPP funding available to businesses that previously received a PPP loan. Businesses are eligible for a second PPP loan of up to $2 million, provided they have 300 or fewer employees, have used or will use the full amount of their first PPP loan, and can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.

Fresh PPP loans also are available to first-time borrowers from the following groups:

• Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
• Sole proprietors, independent contractors, and eligible self-employed individuals.
• Not-for-profits, including churches.
• 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.

The legislation also allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.

PPP Loan Terms

As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:

• Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
• Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
• Covered operating costs such as software and cloud computing services and accounting needs.

To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the same parameters PPP1 had when it stopped accepting applications in August.

PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.

Simplified Application and Other Terms of Note

The new COVID-19 relief bill also:

• Creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if the borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
• Repeals the requirement that PPP borrowers deduct the amount of any Economic Injury Disaster Loan advance from their PPP forgiveness amount.
• Includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.

Interim Final Rule for First Time Borrowers

While the Business Loan Program Temporary Changes; Paycheck Protection Program as Amended IFR has many provisions. As with the PPP1, the loans are guaranteed under the PPP2 program will be 100% guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness. The Economic Aid Act reauthorizes lending under the PPP through March 31, 2021 and revises certain PPP requirements as noted above. The following outlines the key provisions of the PPP related to eligibility of applicants for PPP loans, which lenders are authorized to make PPP loans, the process for making PPP loans, loan increases, and loan forgiveness, as revised by the Economic Aid Act.

While this IFR fully implements the Economic Aid Act’s changes to loan forgiveness, SBA also intends to issue a consolidated rule governing all aspects of loan forgiveness and loan review as well to provide a single reference point for lenders and borrowers.

Eligibility

You are eligible for a PPP loan if you, together with any affiliates are:

• a small business concern under the applicable revenue-based size standard established by SBA in 13 C.F.R. 121.201 for your industry or under the SBA alternative size standard an independent contractor, eligible self-employed individual, or sole proprietor.
• a business concern, a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, and you employ no more than the greater of 500 employees or, if applicable, the size standard in number of employees established by SBA in 13 C.F.R. 121.201;
• a housing cooperative, an eligible section 501(c)(6) organization, or an eligible destination marketing organization that employs no more than 300 employees.
• a news organization that is majority owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151, that employs no more than 500 employees (or, if applicable, the size standard in number of employees established by SBA in 13 C.F.R. 121.201 for your industry) per location; or
• another type of entity specifically provided for by PPP rules

In addition, you had to be in operation on February 15, 2020, and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC or you were an eligible self-employed individual, independent contractor, or sole proprietorship with no employees.

You must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable, payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship, or bank records.

To calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules expressly do not apply to the entity.

A seasonal business will be considered to have been in operation as of February 15, 2020, if the business was in operation for any 12-week period between February 15, 2019 and February 15, 2020. This approach aligns the eligibility criteria for seasonal businesses being in operation with the time period for calculation of a seasonal employer’s maximum loan amount from section 336 of the Economic Aid Act and makes PPP loans available to seasonal businesses that operate outside of the original, more limited time frame.

The IFR outlines other eligibility requirements which I encourage you to read.

Loan Amount

Use the following steps to calculate the amount of the PPP2 loan:

1. Aggregate payroll costs from 2019 or 2020 for employees whose principal place of residence is the United States.
2. Subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred.
3. Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
4. Multiply the average monthly payroll costs from Step 3 by 2.5.
5. Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

You must provide Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever you used to calculate loan amount), or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020.

Applicants with self-employment income should follow the steps in the IFR to calculate their PPP2 loan amount. Seasonal employers, farmers, partnerships, and certain other businesses should also check the guidance to determine how they should calculate their loan amount.

Payroll Costs

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

The following items are not included in payroll costs:

• Any compensation of an employee whose principal place of residence is outside
• of the United States.
• The compensation of an individual employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred.
• Federal employment taxes imposed or withheld during the applicable period, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
• Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

Independent contractors can apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.

Loan Terms

The interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis. The maturity date of a PPP2 loan is five years.

If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).

Your “loan forgiveness covered period” is the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement. Your lender must notify you of remittance by SBA of the loan forgiveness amount (or notify you that SBA determined that no loan forgiveness is allowed) and the date your first payment is due. Interest continues to accrue during the deferment period.

If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period.

Use of Funds

The proceeds of a PPP2 loan can be used for:

• payroll costs (as defined in the CARES Act, Economic Aid Act, and this interim final rule).
• costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums.
• mortgage interest payments (but not mortgage prepayments or principal payments).
• rent payments.
• utility payments.
• interest payments on any other debt obligations that were incurred before February 15, 2020.
• refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
• covered operations expenditures (payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses).
• covered property damage costs (costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation).
• covered supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that—(A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan);
• covered worker protection expenditures (A) operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency with respect to the COVID–19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; (B) such expenditures may include—(i) the purchase, maintenance, or renovation of assets that create or expand—(I) a drive-through window facility; (II) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (III) a physical barrier such as a sneeze guard; (IV) an expansion of additional indoor, outdoor, or combined business space; (V) an onsite or offsite health screening capability; or (VI) other assets relating to the compliance with the requirements or guidance described in subparagraph (A), as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (ii) the purchase of—(I) covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; (II) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (III) other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (C) such expenditures do not include residential real property or intangible property).

At least 60% of the PPP loan proceeds must be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs to determine the amount of forgiveness.

The IFR includes separate guidance for the use of PPP2 funds by individuals with income from self-employment who file a Form 1040, Schedule C.

The IFR outlines what PPP2 borrower needs to do to certify the usage of the loan proceeds. As with the first round of PPP, forgiveness can be for all or part of the loan.

The IFR also address what lenders need to know, as well as additional information for both borrowers and lenders. I highly encourage you to read the IFR.

We will address the guidance on borrowers taking out a second PPP loan in a separate alert. In the interim, you can read the IFR on getting a second PPP loan.

Be sure to check out the NASBP Virtual Seminar that features McCarthy's insights and tips into construction accounting and financial statements for 2021.     

Marty McCarthy, CPA, CCIFP, is the managing partner of McCarthy & Company, PC. Known to be a proactive and astute businessman, he is valued for bringing issues to a client’s attention before the client even knows that something may be wrong. Marty keeps a close eye on what is happening in his clients’ businesses and industries, as well as changes to the tax law, accounting pronouncements, and government regulations, so clients can focus on their businesses. Clients trust Marty’s thoughtful and candid advice. Marty can be contacted at 610.828.1900 or Marty.McCarthy@MCC-CPAs.com.