Highlights of PPP and ERC COVID-Relief Legislation

New York, NY — January 29, 2021

 

On December 27, 2020, the Federal Appropriations Bill to fund the government through September 30, 2021 was signed into law.  Two major components of the legislation are the Covid-related Tax Relief Act ("COVIDTRA") which modifies and expands the Paycheck Protection Program ("PPP") and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ("TCDTR") which does the same for Employee Retention Credits("ERC").  Of particular note is the definitive legislation regarding forgiveness, new PPP "Second Draw" eligibility, and retroactive ERC availability for first-time PPP borrowers and extended availability through June 2021 for all eligible employers.

Below is a summary of the supplements and changes made to the PPP,  PPP "Second Draw" and Employee Retention Credit (ERC) programs including eligibility and tax considerations.

Changes to the Paycheck Protection Program ("PPP") 

  • Businesses whose PPP loans are forgiven may deduct qualified expenditures (which are otherwise deductible) paid from loan proceeds. The tax basis of a pass-through interest (S-Corp, Partnership, LLC) is not reduced by the amount of loan forgiveness. This is contrary to IRS guidance issued after the original PPP. Under that guidance, forgiven loan proceeds used for qualified payroll and other expenses were not deductible.

    • At the time that the original CARES Act was enacted, in order to protect the state from budget shortfalls, New York enacted a decoupling from changes made to the Internal Revenue Code as the result of the CARES Act. The good news is that the tax-free status of any PPP Loan forgiveness is not affected by New York decoupling and is tax-free for state and federal purposes.

  • "Second Draw" PPP loans are now available to eligible entities:

    • Eligible entities include for-profit businesses, certain non-profits, housing co-ops, self-employed individuals, sole proprietors, and independent contractors.

    • The loan application period is extended from August 8, 2020 to March 31, 2021 (having previously been extended from June 30, 2020 to August 8, 2020).

    • Maximum employment is reduced to 300 employees (300 employees per location for restaurants, hotels, and other businesses under the NAICS Code 72 and other per location) vs. 500 employees under original PPP. This is intended to focus on smaller businesses that are viewed as more in need of the financing and were crowded out under the original PPP loan legislation.

    • Loans are capped at $2 million and restricted to one per borrower, regardless of the number of locations. Under the original PPP provision loans were capped at $10 million.

If loans were obtained in 2020, the incremental loans plus the amounts taken in 2020 cannot exceed $10 million in the aggregate. All prior loan proceeds must be expended before applying for a new loan.

  • To qualify, the entity must demonstrate a reduction of at least 25% of gross receipts between any corresponding 2020 and 2019 quarters. There is now a bright-line test for eligibility in addition to certifying economic need, which remains in effect.

  • Repeat applicants for less than $150,000 do not need to show reduction in receipts to qualify for loans, although they do need to demonstrate the reduction for forgiveness.

  • Borrowers may receive 2.5 times average monthly payroll costs. For hospitality and food-service businesses, a loan equal to 3.5 times average monthly payroll costs is available.

  • "Second Draw" PPP loans are not available to publicly traded companies or Companies owned more than 20% by Chinese nationals.

  • The SBA issued a "Second Draw" Loan Application with instructions. To view CLICK HERE

 New rules for Application for forgiveness:

  • Application for forgiveness must be made within 10 months of the last day of the covered period.

  • COVIDTRA adds flexibility to the "covered period" – the borrower may designate the end point of the covered period as 8 or 24 weeks after the origination date of the covered loan.

  • COVIDTRA added covered operational expenditures, property damage due to public disturbances, supplier costs, and worker protection expenditures (such as personal protective equipment).

  • The expanded covered expenditures may be used by borrowers of the 1st round of PPP loans who have not yet applied for forgiveness.

  • In June, the PPP Flexibility Act decreased the percentage of proceeds that must be used for payroll costs from 75% to 60%. The proceeds that can be used to pay mortgage interest, rent, or utility bills were thereby increased from 25% to 40%.

Employee Retention Credit ("ERC")

The Employee Retention Credit ("ERC") is extended through June 30, 2021.

  • Previously

    • Under the CARES Act, PPP borrowers could not claim the ERC. The PPP provides up to $20,833 per employee (2.5/12 x $100,000 of payroll) whereas the ERC is limited to $5,000 per employee ($10,000 X .5).

  • As Revised

    • Under TCDTR, PPP borrowers can "double-dip". They are now eligible to claim the ERC on wages not funded with PPP proceeds. Also, employers can retroactively claim the ERC using the rules in effect during 2020 for wages not funded with PPP proceeds.

  • Previously

    • Under the CARES Act, a refundable payroll-tax credit was available for up to 50% of the employer's payroll on qualified wages not to exceed $10,000 per employee, per year. Accordingly, in 2020, the refundable credit was available to offset payroll taxes of up to $5,000 per employee (or refunded if employer payroll taxes are overpaid).

  • As Revised

    • In 2021, TCDTR increases the credit to 70% of the employer's payroll on qualified wages not to exceed $10,000 per employee, per quarter. Therefore, in 2021, the refundable credit is available for up to $14,000 per employee (two quarters at 70% of $10,000).

  • Previously

    • Under the CARES Act, gross receipts had to decline by more than 50%, when comparing corresponding quarters in 2020 to 2019.

  • As Revised

    • For 2021, TCDTR increases the eligibility by reducing the percentage decline in gross receipts to 20% quarter over quarter. Employers may elect to use the prior calendar quarter for comparison.

  • Previously

    • In 2020, eligibility for the credit was limited to employers with 100 or fewer full-time equivalent employees. In 2021, that limit is raised to 500.

  • As Revised

    • Qualified Health Plan Expenses, even for furloughed employees (not receiving wages), are now includible for the ERC. In 2020, health expenses were includible only for active employees.

 We are available to discuss any questions you may have. Please contact your Perelson Weiner Partner.