New stimulus bill includes second round of PPP loans for small businesses and changes to borrower-friendly forgiveness rules

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Congress finally adopted a second stimulus bill this week – as of this writing, it is still awaiting President Trump’s signature – and it includes a second round of PPP ready for affected small businesses as well as changes to loan cancellation rules that are favorable to PPP borrowers. The second round of PPP loans for affected small businesses is called “second draw loans”. While the rules for these second draw loans are familiar, they have changed dramatically from the original program, so small businesses and lenders need to quickly find out who qualifies. In addition to providing a second round of PPP loan financing for qualifying businesses, the legislation includes tax-friendly changes to loan forgiveness and adds a simplified one-page forgiveness request for loans of $ 150,000 or more. less.

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Second drawdown of PPP loans

The most important development in legislation for small businesses is a second round of PPP loans. The new legislation allocates around $ 284 billion and qualifies the new loans as second-draw loans. The loan limit is $ 2 million, and the amount a small business will qualify for is determined by taking its average monthly payroll in 2019 and multiplying it by 2.5. In other words, the second wave of PPP loans is intended to finance 2.5 months of salary costs. The bill has a special calculation for restaurants and food businesses and provides these businesses with a larger loan amount of 3.5 months of average monthly payroll. So, for example, if your average monthly payroll in 2019 was $ 100,000, your small business would be entitled to $ 250,000. If you were a restaurant or other qualifying food business, you would be entitled to $ 350,000.

Related: Joel Osteen’s Church Receives Over $ 4 Million In PPP Loans

To be eligible for a second PPP loan, a small business must have 300 employees or less, down from the original maximum of 500 employees in the first round. And a small business must have already used or plan to use its original PPP financing. Similar to the original P3 loan program, the small business can use the loan proceeds over a 24-week period and can use the funds for payroll, rent, and mortgage expenses. The bill also adds new expenses to the list of “eligible expenses”. These new eligible expenses include operating expenses, workplace protection costs to protect employees from Covid, and covered property damage.

25% loss of income required to qualify

To be eligible for a second loan, a small business must certify that it has experienced a loss of income of 25% or more. This criterion is radically different from the original qualifying rules for PPP, which simply required the small business to declare that economic uncertainty made the PPP loan necessary. As part of the 25% revenue loss test, the small business will compare its 2020 quarterly revenue (that is, gross revenue) to its 1st, 2nd and 3rd quarters of revenue in 2019. In order to be To qualify for a second PPP loan, a borrower must be able to show a loss of income of 25% or more in at least one quarter of 2020 compared to that same quarter in 2019.

Second Draw Loans Eligible for Remission under the 60% Payroll Rule

Second-draw loans are repayable but must be spent at 60% on salary costs. Since the loan amount is based on 2.5 months of average payroll, which is 10-11 weeks, and the small business can use the funds over a 24 week period, it seems very likely that most small businesses companies will be able to use 60% of PPP funds on salary costs.

PPP loans at origin and at second drawdown will not be taxable in the event of forgiveness

The new legislation provides that canceled PPP loans will not be taxable for the small business borrower. This applies to all existing PPP loans under the original CARES Act as well as new second draw PPP loans. Prior to the legislation, the IRS issued guidelines for small businesses stating that PPP borrowers could not spend their salaries and other eligible costs that they were using their PPP funds for if they ended up getting their PPP loan canceled. By denying the deduction, the IRS was effectively taxing the small business for its P3 loan. This position seemed contrary to what Congress intended with the CARES Act and the original PPP legislation in March, but it literally took an act of Congress here to correct the IRS’s interpretation. The good news for small businesses is that borrowers can have their P3 loan canceled, and they will still be able to deduct their payroll and other eligible expenses that they have used their P3 funds on.

The legislation also states that emergency EIDL grants and advances, which are considered forfeited and, in most cases, do not need to be repaid, are also not taxable to the small business borrower.

Loans under $ 150,000 will benefit from a simplified pardon application

The legislation requires the SBA to create a simplified PPP pardon application for small businesses with P3 loans of less than $ 150,000. The simplified application should fit on one page and will include loan information as well as an attestation from the business owner that the funds have been used correctly and are eligible for a rebate, but will not include calculations or other additional information. The SBA already has a simplified one-page PPP forgiveness request for borrowers of $ 50,000 or less. It is likely that the SBA will use a similar application for borrowers with loans of less than $ 150,000. See my previous article on the simplified pardon request here.

Related: Mysterious Maine Farm Secured $ 1.2 Million PPP Loan

Once signed into law by the president, which the White House said was likely, the SBA and Treasury were tasked with providing interpretive advice and forms for the new surrender rules, as well as loan applications and guidelines for second-draw PPP loan borrowers.

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