After months of partisan wrangling, on December 20, 2020, Congressional negotiators finally agreed on a new $900 billion Covid relief package, which includes an additional $284 billion for the Paycheck Protection Program (PPP) for small businesses, created under the original Coronavirus Aid, Relief, and Economic Security Act (or CARES Act) in March.
This new package provides additional funding for those businesses that did not receive PPP money in the first round, especially minority- and women-owned businesses. In addition, it allows businesses a second chance at PPP money if they can show losses of 25% or higher in 2020 over their 2019 revenue.
The bill also addressed what was probably the biggest outstanding issue with PPP: the deductibility of expenses paid for with the forgivable loan. The Trump Administration position to date, largely led by Treasury Secretary Steven Mnuchin, was that businesses could not deduct the expenses paid for with PPP funds as they ordinarily would because the loan is forgivable and not taxable income. The Administration’s view was taking the tax deductions would be “double dipping” on top of the grant. The business community was up in arms about this adverse tax consequence, which is now corrected.
How small businesses will benefit from new relief package
In addition to the tax fix, the new bill provides the following aid to small businesses:
- Funds for businesses that received the first round of PPP funds but can qualify for another bite at the apple if they can show significant losses in 2020 over 2019
- Funds earmarked for non-profits and news outlets that weren’t eligible in the first round
- $15 billion for live venues, independent movie theaters, and cultural institutions
- $20 billion for targeted grants through the Economic Injury Disaster Loan program through the Small Business Administration (SBA)
- Tax deductions for business meal expenses
- Funds earmarked for “very small” businesses and lending through community-based lenders like Community Development Financial Institutions (DDFIs) and Minority Depository Institutions (MDIs). This includes $9 billion in U.S. Treasury capital investments in CDFIs and MDIs and $3 billion for the CDFI fund to support low income and underserved communities.
PPP loan forgiveness
The PPP program closed on August 8, 2020, after approximately 5.2 million businesses applied for and received the loans. If businesses use the funds according to the regulations, which include spending at least 60% on payroll to keep people employed and the additional funds on rent, utilities, mortgage payments, and interest on existing debt, they can apply for forgiveness and have the loan convert into a grant that does not need to be repaid. Notably, due to confusion and concern around the program, approximately $130 billion dollars in funds were left unused at the August closing.
Most businesses that did receive PPP loans have begun to apply for forgiveness. The process includes applying through the lender who provided the loan and supplying documentation that the funds were used appropriately. For most businesses that means documenting payroll through reports most payroll companies provide expressly for this purpose and receipts for expenses. The lenders have 60 days to review and approve the application before submitting it to the SBA for its review. The SBA has 90 days to approve the application or request more information from the borrower.
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On October 8, 2020, the SBA along with the Treasury Department issued new guidance allowing borrowers with PPP loans of $50,000 or less to self-certify they used the money appropriately and receive complete forgiveness. While this latest Interim Final Rule addressing the PPP loans still required borrowers to provide documentation, such as a payroll provider report, it offers a new, simplified form and a “check the box” process for forgiveness. Borrowers can use new SBA Form 3508EZ for their application or wait for their lender to update their online application portals.
The SBA justified this easing of requirements as the majority of PPP loans were less than $50,000. According to the SBA, there are 3.57 million outstanding PPP loans of $50,000 or less out of the 5.2 million issued, totaling approximately $62 billion of the $525 billion in PPP loans.
This exemption was long sought by lenders and the business community, albeit at a higher level. Initially, these interested parties sought “check the box” forgiveness at $1 million or in the $250,000 to $500,000 range. Those numbers proved too ambitious and the SBA settled on the $50,000 level.
Evaluating “economic uncertainty”
Businesses that received loans in excess of $2 million are not so lucky. The SBA all along has stated that these borrowers will be subject to an audit. But, on October 26, 2020, the SBA issued a draft Form 3509 requiring borrowers to document their economic uncertainty at the time they applied for the PPP loans. On the initial applications, all borrowers had to attest that “the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Ordinarily, with SBA loan applications borrowers must show they do not have sufficient liquidity or credit elsewhere, and thus the loan is necessary. SBA did not require that for PPP and now it appears certain borrowers will need to document their need retroactively, or perhaps be denied forgiveness and suffer legal consequences.
The new form would require disclosures such as gross revenue, cash on hand, dividends and distributions, outstanding debt, and compensation of highly paid owners and employees. Despite the fact that for many businesses providing the government with this information is less than desirable, it also begs the question as to how the SBA will evaluate “economic uncertainty” at the start of the Covid pandemic. While some businesses pivoted, survived, or even thrived, they could not have predicted the economic impact of Covid in March of 2020. Now heading into seemingly another period of lock downs and restrictions, along with the passage of this new relief package, the SBA will be hard pressed to find businesses undeserving of PPP loans and subsequent forgiveness.
The Associated General Contractors of America filed a lawsuit against the SBA and the Office of Management and Budget on December 8, 2020, arguing that these new forms and disclosures are both procedurally wrong and a violation of due process. The procedure argument is based on the fact that the SBA did not publish the new forms with time for comment. The due process argument, which likely has more merit, is based on the fact that businesses should not be held accountable for successfully weathering the Covid storm after they self-certified the need for PPP money. Many interested parties will be monitoring this litigation closely.
While the new relief package is surely welcomed by small businesses and is much needed, it remains to be seen if the money will go to the small businesses that truly need it to survive or the same well-equipped, larger businesses will lap up the funds. And, as has occurred all along, we can expect new and evolving regulations, likely in the very near future.
RELATED: SBA Easing Forgiveness of Paycheck Protection Program Loans of $50,000 or Less
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