By Leon LaBrecque, JD, CPA, CFP®, CFA | Chief Growth Officer, Sequoia Financial
The Consolidated Appropriations Act (CAA) gave us some last-minute fiscal relief, notably $600 stimulus checks for individuals and provisions for some hard-hit areas aimed at mitigating the continuing economic impact of the Covid-19 pandemic.
Small businesses saw more stimulus in a second round of the Paycheck Protection Program (PPP), which we’ll call PPP2. PPP2 is potentially very helpful, but be quick, the deadline for applications is March 31, 2021. President-elect Biden is already talking about the next stimulus package, but let’s take a quick look at PPP2 and another facet, a ‘Stealth Stimulus,’ the Employee Retention Credit (ERC). The new law allows businesses to leverage both the PPP2 and the ERC, offering double benefit. The ERC was significantly increased as well. Here are some highlights:
PPP2:
Who is eligible?
- Businesses, sole proprietors, self-employed individuals and non-profits (including churches) in operation on February 15, 2020
- PPP1 Recipients:
- 300 or fewer employees
- Have or will use full amount of PPP1 loan before the disbursement of the PPP2 loan
- 25% reduction in gross receipts in any 2020 quarter compared to same quarter in 2019 (calendar year can be used if the business saw a 25% annual reduction, if one quarter does not qualify)
- First-Time Borrowers (did not receive a PPP1 loan)
- 500 or fewer employees
- In operation since February 15, 2020
- Eligible for other SBA 7(a) loans
- Did not receive a Shuttered Venue Operator Grant
Maximum Loan Amount
For most businesses, the maximum loan is 2.5 times the average monthly payroll costs in the 12-months prior to the loan or calendar year 2019 with a cap of $2,000,000. Business in the hospitality/restaurant industry (NAICS code starting with 72) get a multiple of 3.5.
Forgivable Costs
- Expanded definition of “Forgivable Costs” applies to PPP1 and PPP2 loans
- Payroll, rent, covered secured loan interest, utilities, operating costs (including software, cloud computing and accounting services)
- Covered operations expenditures (i.e. software and cloud computing services used for the business)
- Property damage, vandalism and looting costs due to public disturbances that occurred during 2020 that are not covered by insurance
- Essential supplier expenditures, and,
- Investments in facility modifications and PPE to comply with Covid-19 federal health and safety guidelines
Maximum Forgiveness: As with PPP1, full forgiveness will require the 60/40 allocation between payroll and non-payroll costs. Maximum forgiveness is the lesser of loan amount or covered payroll cost divided by 60%.
EIDL Advance: EIDL Advances no longer reduce the forgiveness amount and expenses paid with EIDL Advance dollars are deductible. Furthermore, borrowers will be made whole if EIDL Grant amounts were deducted from their PPP1 forgiveness amount.
EIDL Loans: Borrowers may receive an EIDL and PPP2 loans; however, the EIDL funds may not be used for forgiven expenses.
Covered Period: Employer can select a Covered Period that ends between 8 and 24 weeks after the date the loan funds were disbursed (“Loan Origination Date”).
Payroll Expenditure Requirement: At least 60% of loan proceeds must be spent on payroll costs (e.g. cash wages and employer’s portion of health insurance, unemployment insurance and retirement).
Loan Application Period: PPP2 loan application period ends March 31, 2021.
Interest Rate: 1% Non-compounding.
Loan Term: 5 years (6-month deferment of payments)
Loan Fees: None
Prepayment Penalties: None
Personal Guarantee: None
Tax Treatment: Expenses paid with PPP1 or PPP2 funds are deductible.
Simplified Loan Forgiveness: Application simplified, one-page loan forgiveness application for loans under $150,000.
Employee Retention Credit (ERC)
Size of credit: Maximum credit is 70% of up to $10,000 of “Qualifying Wages” paid per employee per calendar quarter through June 30, 2021. (Maximum 2021 credit is $14,000 per employee.)
Qualifying Wages:For employers with 500 or fewer employees, credit can be taken for wages paid to employees who are performing work. Larger employers may only receive the credit for wages paid to employees who are not working (performing services). Qualifying wages includes the employer’s portion of group health premiums that are not taxable to the employee and are allocated to an employee (e.g. employer-paid health insurance, FSA, HSA, etc.) Payroll paid with PPP funds don’t qualify as “qualifying wages” (no double-dipping).
Pay Raises: The ActRepealed the disallowance of the credit for pay increases. now allowing the credit for hazardous duty pay increases and other increases.
Qualifying Employers:
Gross receipts must have declined at least 20% from the same quarter in 2019. Employers who were not in business in 2019 qualify if revenue for current calendar quarter declined 20% or more as compared to same quarter in 2020.
Alternate Gross Receipt Test: For 2021, employers can elect to look at the immediately preceding calendar quarter and compare that quarter to the corresponding quarter in 2019. For example, an employer who fails the gross receipt test in Q1 of 2021 could still qualify in Q1 by electing to compare gross receipts in Q4 of 2020 to Q4 of 2019. If gross revenue declined by more than 20% quarter-over-quarter, Q1 of 2021 will be an eligible quarter.
Limit on advanced refunds:
- Refund amount cannot exceed 70% of average quarterly wages paid in 2019.
- Employer must have 500 or fewer employees
PPP1 and PPP2: Under the modified rule, employers can claim the employee retention credit on any eligible wages not used to support PPP loan forgiveness and any wages that could count toward both provisions can be applied to either, but not both, at the election of the employer.
Bottom Line: CAA offered significantly increased stimulus, for individuals, but perhaps more critically, for small businesses. Under CARES, you could get a PPP1, but then offset that with an EIDL and the ERC. Now there is a PPP2, deductibility of PPP expenses, you can have an EIDL under PPP2 and you can have a ERC and a PPP. Lots to get, and a short time to get it.