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PPP Revisions Target Smallest Businesses

The Biden administration announced several reforms to the Paycheck Protection Program (PPP) to provide additional relief for the smallest and most vulnerable businesses. It also changes several rules to expand PPP loan forgiveness eligibility.

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PPP Overview

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in the early days of the COVID-19 pandemic, established the PPP to help employers cover their payrolls during the resulting economic downturn. The program is open to almost every U.S. business with fewer than 500 employees affected by the pandemic, including sole proprietors, self-employed individuals, independent contractors, and nonprofits.

Generally, the loans are 100% forgivable if the proceeds are allocated on a 60/40 basis between payroll and eligible non-payroll costs. The latter initially were limited to mortgage interest, rent, utilities, and interest on any other existing debt. However, December’s Consolidated Appropriations Act (CAA) expanded the qualifying non-payroll costs, including certain operating expenses and worker COVID-19 protection expenses.

The CAA also provided another $284 billion in funding for forgivable loans for both first-time and so-called “second-draw” borrowers. The second-draw loans are restricted to smaller and harder-hit businesses.

In addition, the CAA established a simplified, one-page forgiveness application for loans up to $150,000. It clarified that PPP borrowers aren’t required to include any forgiven amounts in their gross income for tax purposes, and that borrowers can deduct otherwise deductible expenses paid with forgiven PPP proceeds.

The Impetus for the New Changes

According to the Small Business Administration (SBA), the new reforms are intended to ensure equity in the program. The SBA says a “critical goal” of the latest round of PPP funding in the CAA was to reach small and low- and moderate-income (LMI) businesses that hadn’t yet received needed relief.

Under current policies, though, the second round has distributed only $2.4 billion of a $15 billion set-aside for small and LMI “first-draw” borrowers. According to the SBA, this is partly because a disproportionate amount of funding in both wealthy and LMI areas is going to businesses with more than 20 employees. The Biden administration hopes to remedy that disparity with the announced revisions.

The Changes

The announcement outlined a number of reforms, including:

1. A revised loan-calculation formula.The current formula is based on net profits. As a result, many of the smallest businesses (such as sole proprietors, independent contractors, and self-employed individuals) were excluded from the PPP.

The SBA revised the formula so that sole proprietors, independent contractors, and self-employed individuals can use gross income instead of net income to calculate their loan amount, capped at $100,000. That means solo ventures that don’t show net profits on their federal tax returns nonetheless can receive PPP loans. The administration will also set aside $1 billion for businesses in this category without employees located in LMI areas.

2. The elimination of the non-fraud felony exclusion. The existing rules restrict PPP eligibility based on criminal history. A business is ineligible for PPP funding if an owner with a 20 percent or greater stake has either 1) an arrest or conviction for a felony related to financial-assistance fraud in the previous five years, or 2) any other felony in the previous year.

To expand access, the SBA is adopting some of the proposals from a bipartisan bill in Congress dubbed the Second Chance Act by eliminating the one-year lookback for non-felony convictions. Only the five-year lookback restriction for felonies involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance will limit an applicant’s PPP eligibility.

3. The elimination of the student loan exclusion.Current rules prohibit PPP loans to any business that is at least 20% owned by an individual who is delinquent or has defaulted on a federal debt within the previous seven years. Federal student loans fall within the definition of such debt.

The pandemic has only exacerbated the number of Americans who are delinquent on their student loans. The SBA has eliminated the exclusionary restriction that prevents small business owners who are delinquent on their federal student loans from obtaining relief through the PPP. This change applies to new PPP applicants, as well as those borrowers who have already received a PPP loan.

4. Clarification of noncitizen small business eligibility. The CARES Act makes it clear that all lawful U.S. residents can apply for PPP loans. Lack of guidance from the SBA, however, has created inconsistent access for lawful U.S. residents who are holders of Individual Taxpayer Identification Numbers (ITIN), such as Green Card holders and those in the United States on a visa.

The SBA will issue new guidance to address this problem. The guidance will state that otherwise-eligible applicants can’t be denied access to PPP loans solely because they use ITINs when paying their taxes.

California Conformity

California has not conformed to the federal treatment of PPP loan and Economic Injury Disaster Loans (EIDL) grant exclusion and deduction provisions. However, California Assembly Bill AB 80 would partially conform to the federal provisions allowing PPP deductions for expenses paid with PPP loan forgiven amounts, retroactive to the 2019 taxable year. This bill has not yet passed. California legislators are negotiating the terms of this bill, and time will tell whether there will be full conformity or whether the expense deductions will be capped at a specific amount (e.g., $150,000 per taxpayer).

Stay Tuned

Earlier today, Congress approved the Biden administration’s proposed $1.9 trillion COVID-19 relief package, known as the American Rescue Plan of 2021. That bill doesn’t specifically address the PPP, but it includes $15 billion in grants to help small businesses, $35 billion in small business financing programs, and unspecified aid to restaurants, bars, and other businesses that have suffered disproportionately. This relief package is on the verge of becoming law, as the President is expected to sign it ahead of the March 14 expiration of unemployment insurance benefits..

Seiler is Here to Help

Seiler’s COVID-19 Relief Advisory Service Team is available to answer your questions about these reforms and help you make the most of the changes. For more information, please contact your Seiler tax advisor, or Advisory & Assurance partners Debbie McCall or Erin Hastings, at 650.365.4646.

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