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Following extensive negotiation and threat of a Presidential veto, Congress and the White House recently passed the Consolidated Appropriations Act 2021, which offers comprehensive relief on multiple fronts. Specifically, it provides economic stimulus payments, tax incentives for businesses and additional funds for the Paycheck Protection Program (PPP). While the Act provided an outline of changes, businesses had to wait for Treasury to issue specific guidance. The Treasury has now released a new Interim Final Rule (IFR) which provides details for businesses seeking to obtain a first time PPP loan. To help clients, prospects and others, Selden Fox has provided a summary of the key details below.

Eligibility

The IFR clarifies several aspects of eligibility for entities seeking a Second Draw PPP loan

  • To be eligible for a Second Draw PPP loan, the applicant must have experienced a 25% decrease in gross receipt during any quarter in 2020, as compared to the same quarter in 2019. The IFR provides that the applicant can substantiate the decrease in gross receipts by submitting annual tax returns evidencing a 25% decrease, and that would indicate that at least one quarter during 2020 experienced a decrease triggering eligibility.
  • The IFR clearly states that when computing the 25% decrease in gross receipts, any forgiven PPP First Draw loan is not included in the gross receipts.
  • Second Draw PPP applicants must have (a) received a First Draw PPP loan, and (b) used or will use the full amount on covered expenses before the Second Draw is received.

Loan Amount Calculations

There were several examples provided in the IFR on how to calculate eligible loan amounts, based on the applicant’s situation, however the method most applicable is outlined below. The calculation steps include:

  • Aggregate payroll costs from either 2019 or 2020 (depending on the selected period) for all employees whose principal place of residence is in the United States.
  • Subtract compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period in which payments are incurred or made.
  • Determine the average monthly payroll costs by dividing the resulting amount by 12.
  • Multiply the average monthly payroll costs by 2.5.
  • Finally, if an applicant seeks to refinance an Economic Injury Disaster Loan (EIDL) then add the amount of the loan if issued between January 1, 2020, and April 3, 2020.

For applications that have income from self-employment and file Form 1040 with a Schedule C, the calculation steps include the following:

  • Identify 2019 or 2020 Schedule C, Line 31, net profit amount and if greater than $100,000, then reduce it to that amount. If the amount is zero or less than the applicant is ineligible.
  • Calculate the average monthly net profit amount by dividing net profit by 12.
  • Multiply the average monthly net profit by 2.5.
  • Finally, if an applicant seeks to refinance an EIDL then add the amount of the loan if issued between January 1, 2020, and April 3, 2020. Remember not to include any amounts from an EIDL advance because they do not need to be repaid. 

Eligible PPP Loan Uses

The IFR outlines the covered expenses borrowers may use loan proceeds to satisfy. While some expenses are a carryover from past requirements, there is important information pertaining to recently added covered expense categories. Loan proceeds may be used on the following:

  • Rent, utility, and mortgage interest costs.
  • Costs related to the continuation of group health, dental, life, disability, and vision benefits during periods of paid sick or family leave, including premiums.
  • Expenses incurred refinancing an EIDL made between January 1, 2020, and April 3, 2020.
  • Operations expenditures including any software or cloud computing service that facilitates business operations; service delivery; process, payment or tracking of payroll expenses; human resources; sales and billing functions; accounting; and the tracking of supplies, inventory, records, and expenses.
  • Property damage costs including property damage and vandalism which occurred due to public disturbances in 2020. Only expenses that not covered by insurance or other compensation are eligible.
  • Supplier costs including expenditures made to a vendor for goods that are essential to continuing operations when incurred, made to satisfy a contract, order, or purchase order.
  • Worker protection expenditures including those necessary to adapt business activities to ensure compliance with relevant health standards and guidance. There were several examples of covered protection expenses such as HVAC upgrades; physical barrier or sneeze guard installation; expansion of indoor, outdoor, or combined space; on or offsite health screen program; and other assets necessary for compliance.
  • Owner compensation replacement for self-employed individuals only calculated based on 2019 or 2020 net profit.

It is important to note that PPP loan proceeds may not be used for lobbying activities or expenditures.

Contact Us

The details provided in the IFR provide important information Chicago businesses should consider when applying for a PPP loan. Since the guidance is comprehensive the details outlined above are a summary of the most important points. If you have questions about PPP or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Paul Rozek

Paul Rozek provides tax research, consulting and compliance services to closely held businesses, tax-exempt organizations, individuals and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions and other nonprofit entities.