On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “Appropriations Act”). Within the $2.3 trillion spending bill, Congress allocated $900 billion in stimulus funds to provide relief to businesses most affected by the COVID-19 pandemic. The stimulus provisions of the Appropriations Act include:
- Changes to and expansion of the Paycheck Protection Program that was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”);
- The extension of the CARES Act Employee Retention Tax Credit;
- The expansion of the Economic Injury Disaster Loan (“EIDL”) program established by the CARES Act; and
- The establishment of a grant program for shuttered venue operators.
CHANGES TO AND EXPANSION OF THE PAYCHECK PROTECTION PROGRAM
In March of 2020, Congress established the Paycheck Protection Program through passage of the CARES Act. The CARES Act authorized the use of the Small Business Administration (the “SBA”) lending program to provide forgivable loans of up to $10 million (“PPP Loans”) to qualified small businesses. The PPP Loans would be forgivable if used for specified expenses.
EXPANDED FORGIVABLE USES OF PPP LOAN FUNDS
The CARES Act imposed strict conditions on the use of PPP Loan funds for forgivability purposes. To be forgiven, borrowers were required to use PPP Loans exclusively for payroll, mortgage interest, rent or utility expenses. In addition to the uses permitted under the CARES Act, the Appropriations Act has expanded the permitted uses of PPP Loans to include:
- Covered operations expenditures, defined as “any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting tracking of supplies, inventory records and expenses.”
- Covered property damage costs, defined as “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”
- Covered supply cost, defined as “an expenditure made by an entity to a supplier of goods for a supply of goods that: (a) are essential to the operations of the entity at the time at which the expenditure is made; and (b) is made pursuant to a contract, order, or purchase order (i) in effect at any time before the covered period …; or (ii) with respect to perishable goods, in effect before or at any time during the covered period.”
- Covered worker protection expenditures, defined as “an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance … related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”
Notably, the Appropriations Act still requires that payroll expenses represent at least 60% of the total expenses for which forgiveness is sought.
COVERED PERIOD FLEXIBILITY
The CARES Act required that borrowers used PPP Loan funds within either an 8-week or 24-week “covered period”. The Appropriations Act, however, allows PPP Loan borrowers to choose a covered period between eight and 24 weeks, thus giving borrowers more flexibility.
For PPP Loans of $150,000 or less, the Appropriations Act requires the SBA to provide a simplified forgiveness application process by January 20, 2021. The new process must be a certification of no more than one page requiring borrowers seeking forgiveness to specify the number of employees retained, the total PPP Loan amount, estimated amounts of PPP Loan funds spent on payroll costs and an attestation of compliance with the requirements of the PPP Loan program. No additional applications or documentation will be required from such borrowers.
ADDITIONAL DRAW ON FIRST LOAN
Existing borrowers may reapply for additional funds for their first draw PPP Loan if they have not received forgiveness as of December 27, 2020, and they returned any portion of their PPP Loan or did not borrow the maximum amount for which they were eligible.
TAX DEDUCTIBILITY OF EXPENSES PAID WITH PPP LOAN FUNDS
The CARES Act was silent on the issue of tax deductibility of eligible expenses. As a result, the Internal Revenue Service took the position that such expenses were not deductible, while others argued that by passing the CARES Act Congress intended for these expenses to be deductible. The Appropriations Act has resolved this controversy by deeming that all business expenses paid with forgiven PPP Loans are tax-deductible.
SECOND DRAW PPP LOANS
The CARES Act limited small businesses to one PPP Loan. However, the Appropriations Act permits PPP Loan borrowers to receive a second PPP Loan (“Second Draw Loan”). To qualify for a Second Draw Loan, PPP Loan borrowers must:
- Have used 100% of their first PPP Loan;
- Have no more than 300 employees; and
- Be able to demonstrate that gross receipts during at least one quarter in 2020 were down at least 25% from a comparable quarter in 2019.
The Second Draw Loan amount is limited to the lesser of 2.5 times monthly payroll costs or $2 million, except for some businesses in the accommodation and food service sector which may borrow the lesser of 3.5 times their monthly payroll costs or $2 million. Under the Appropriations Act, Second Draw Loans will be available through March 31, 2021.
EXPANSION OF CARES ACT EMPLOYEE RETENTION TAX CREDIT
Under the CARES Act, the employee retention credit (the “Credit”) was a payroll tax credit available to eligible employers for the purpose of retaining employees during the pandemic. The Appropriations Act has made several changes to the Credit.
First, the Credit is now available to eligible employers that received PPP Loans, and is available to them retroactively from March 13, 2020. Eligible employers can make a retroactive claim for the Credit on their 4th Quarter Form 941, which is due January 31, 2021.
Second, from January 1, 2021, to June 30, 2021, the Appropriations Act raises the Credit amount to 70% of up to $10,000 of qualified wages per employee per calendar quarter (i.e., up to $7,000 per employee per calendar quarter). Previously under the CARES Act, the credit was limited to 50% of up to $10,000 of qualified wages per employee per calendar quarter (i.e., up to $5,000 per employee per calendar quarter).
Next, under the CARES Act, “qualified wages” for employers with over 100 employees (“large employers”) were limited to wages paid only for employees that were furloughed and not working, whereas “qualified wages” for employers with less than 100 employees included all wages paid without regard to whether the employee was furloughed or not. The Appropriations Act raised the threshold for a large employer to over 500 employees instead of 100.
Also, under the CARES Act, an employer is eligible for the Credit if its gross receipts during a quarter of 2020 are 50% or less than its gross receipts in the same quarter of 2019. Under the Appropriations Act, now an eligible employer requires only a 20% decline in gross receipts. (The Appropriations Act does not change the other way to meet the eligibility test under the CARES Act, which is where an employer was required to fully or partially suspend business operations in any 2020 calendar quarter due to a government order.)
Finally, under the CARES Act, the Credit was not available to any federal, state, or local government or their political subdivisions, agencies, or instrumentalities. But the Appropriations Act made the Credit available to certain governmental entities, such as public colleges and universities, governmental organizations whose principal purpose is to provide medical or hospital care, and certain tax-exempt corporations organized as federal instrumentalities.
EXPANSION OF EIDL LOAN PROGRAM
The Appropriations Act has expanded the EIDL relief. Under the CARES Act, qualified borrowers received emergency EIDL grants up $10,000. A qualified borrower was one that (i) was in a low-income area; (ii) suffered an economic loss of greater than 30%; and (iii) employed less than 300 people. Under the Appropriations Act, any qualified borrower that received an EIDL grant under $10,000 may apply for a second EIDL grant in an amount equal to the difference between the EIDL grant the borrower received under the CARES Act and $10,000. For example, an eligible borrower that received $7,500 under the CARES Act may apply for an additional EIDL grant of $2,500 (i.e., $10,000 – $7,500 = $2,500).
SBA GRANTS FOR SHUTTERED VENUE OPERATORS
The Appropriations Act introduced a new $15 billion grant program administered through the SBA to provide aid to struggling live venue operators and related businesses.
The grants are available to the following entities or individuals:
- Live venue operators or promoters, theatrical producers or live performing arts organization operators;
- Talent representatives;
- Movie theatres; and
- Certain types of relevant museums.
However, certain entities or individuals that otherwise fall into one of the above categories, are automatically ineligible such as:
- Publicly traded companies;
- Those that receive more than 10 percent of their 2019 gross revenue from federal funding;
- Large operators, which includes those (i) with locations in more than one country; (ii) with locations in more than 10 different States; or (iii) those with more than 500 employees;
- Those that received PPP Loans after December 27, 2020; or
- Those engaged in adult entertainment.
An entity or person seeking a grant must meet the following eligibility requirements:
- Must have been fully operational as of February 29, 2020;
- Must have a reduction of 25% or more of gross receipts in at least one quarter of 2020 compared to the same quarter in 2019;
- As of the date of receiving a grant, they must resume, or intend to resume, their business operations;
- Must satisfy certain venue requirements, which vary depending on what type of entity or individual is seeking the grant; and
- Must make a certification of need for the grant due to the uncertainty of the current economic conditions.
DETERMINATION OF GRANT AMOUNT
An initial grant is available to qualified applicants, but the amount varies depending on whether the applicant was in business before 2019. For applicants that were in operation on January 1, 2019, the grant is equal to 45% of the applicant’s total 2019 gross revenue. For applicants that began operations after January 1, 2019, the grant is equal to 6x the average monthly gross revenue for each full month of 2019. However, regardless of when the applicant’s business began operations, the initial grant cannot exceed $10 million.
After receiving the initial grant, applicants may receive a supplemental grant if, as of April 1, 2021, the applicant’s revenue for the 1st quarter of 2021 is less than 30% of the applicant’s revenue from the 1st quarter of 2019. The supplemental grant amount is equal to 50% of the initial grant. However, collectively, the initial grant and the supplemental grant cannot exceed $10 million.
LIMITATIONS ON USE OF GRANT FUNDS
Generally, the applicant may spend the grant funds on any expenses that are likewise permissible under the PPP Loan program. If initial grant proceeds are not spent within one year and supplemental grant proceeds are not spent within 18 months, then the applicant must return the unused grant proceeds to the SBA.
DO YOU HAVE QUESTIONS ABOUT THIS OR PREVIOUS COVID-19 STIMULUS LEGISLATION?
While this client advisory is intended for informational purposes only and is not legal advice, we encourage you to call your SMDK attorney for advice regarding your specific situation. We are available to assist you in answering questions about the Appropriations Act, CARES Act or other federal or state aid for businesses impacted by the COVID-19 pandemic and how these programs apply to you or your business.