Alston & Bird LLP and Aflac
The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (“Economic Aid Act”) enacted Dec. 27, 2020, contains important changes to the Paycheck Protection Program (PPP). The Economic Aid Act extends the authority of the Small Business Administration (SBA) to make additional PPP loans through March 31, 2021. It revises certain rules relating to PPP loans, such as expanding the types of expenses that qualify for forgiveness, and allows certain businesses that had a PPP loan under the CARES Act (called a First Draw Loan) to obtain a Second Draw Loan.
The SBA has issued two rules to provide guidance for these changes:
General changes to the PPP
Additional clarifications and types of expenses eligible for forgiveness include:
Covered loan period: The borrower may elect a covered loan period ending at the borrower’s choice between eight and 24 weeks. Previously, the covered loan period was either eight or 24 weeks, but buyers could apply for loan forgiveness in accordance with SBA rules before the end of the covered loan period.
Simplified forgiveness application for loans under $150,000: Reduced documentation requirements now apply to borrowers with loans less than $150,000, which is intended to streamline the loan forgiveness process.
Other changes: A number of other changes are made by the Economic Aid Act, including the following:
Second Draw Loans
The eligibility requirements for Second Draw Loans are narrower than the eligibility requirements for First Draw Loans. Eligible businesses that previously received a First Draw Loan, including sole proprietors, independent contractors, and S corporations are generally eligible for a Second Draw Loan if the business:
The maximum amount of a Second Draw Loan for most borrowers is the lesser of 2.5 times their average monthly payroll. For businesses with a North American Industry Classification System (NAICS) code 72 (Accommodation and Food Services), the maximum Second Draw amount is the lesser of 3.5 times average monthly payroll and $2 million. In general, average monthly payroll is based either on calendar year 2020 or calendar year 2019.
Borrowers may, but are not required, to obtain a Second Draw Loan from the same lender that provided their First Draw Loan. Businesses should be sure the lender is aware that they are applying for a Second Draw Loan.
IRS position on nondeductibility of expenses paid with PPP loan proceeds is reversed
Under the original PPP provisions in the CARES Act, the IRS took the position that because the amount of a PPP loan that is forgiven is not includible in income, any expenses paid with proceeds from a forgiven PPP loan were not deductible. Although a number of key members of Congress urged the IRS to reverse this position because it was contrary to congressional intent, no change was made. Congress has now resolved this issue favorably by changing the law to make it clear that the amount of a PPP loan that is forgiven is tax-free and taxpayers may deduct expenses paid with forgiven PPP loan amounts. The IRS has already issued new guidance reversing their prior position
The PPP has been a very popular program, providing needed funds to many small businesses impacted by the COVID-19 pandemic. The changes made to the PPP by the Economic Aid Act will allow many businesses to obtain additional relief, including through a Second Draw Loan. This article provides a high-level overview of key changes. The details will vary based on the particular business situation, so businesses should consult their own lender or other advisers to understand how the new rules will work for them.
The information herein is provided for general informational purposes and is not provided as tax, legal, or financial advice for any person or for any specific situation. Employers and employees and other individuals should consult their own tax or legal advisers about their situation. Aflac herein means Aflac and Aflac New York.
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