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All The Key Points You Need To Know About PPP Round 2

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PPP Round 2

PPP under the Cares Act was stymied by a myriad of problems. Congress looked to fix those issues with the new PPP. Did they achieve it? Here are all the key points of PPP round 2 you need to know.

Since the CARES Act became law in March 2020, small businesses and millions of Americans have been waiting for a second round of COVID-19 relief to help keep their businesses operational and their livelihoods intact. After numerous failed attempts by Congress over many months of political stalemate, the U.S. Congress finally overwhelmingly passed a $900 billion COVID-19 relief bill on December 21, now waiting to be signed by the president to become law. The Covid-19 relief legislation provides more than $300 billion in aid for small businesses, and other industries hit hard by the Coronavirus pandemic. The Covid-19 relief legislation establishes a second round of PPP loans, also known as PPP round 2 (PPP2) provisions, as well as addresses a number of problems that PPP borrowers have had with the old PPP offered under the CARES Act (PPP1).

1. Fixes To Issues With PPP Under CARES Act

Tax Deductibility of PPP Expenses

Almost as soon as lenders began making the first PPP loans in April 2020, questions arose as to the tax treatment of the loans, their associated tax attributes, and the impact of the potential forgiveness on both of those issues. In an effort to address this matter, the IRS issued a series of Revenue Procedures and Notices that alarmed many PPP borrowers by stating that expenses paid for with forgiven loans will not be tax deductible. This position was received with surprise to many, including some of the congressional drafters of the PPP provisions who stated that position diverged from their intent.

Looking to clear up that confusion, the legislative body stated that PPP loans which are forgiven will be deductible in the text of the new COVID-19 Relief Bill. However, there are indications that there may be some restrictions on these deductions that we will learn more as the IRS provides more guidance.

EIDL Deductability From PPP Loan

Under the CARES Act, those who received both the Economic Injury Disaster Loan (EIDL) and PPP were required to deduct their EIDL amount from their PPP loan amount. The new bill repeals that previous requirement, which means that PPP borrowers do not have to deduct from their PPP loan any amount they may have received under the EIDL provisions.

Public Companies Eligibility:

The Paycheck Protection Program was aimed at giving America’s small businesses and self-employed persons a lifeline to keep them open during the economic shut down due to the coronavirus pandemic. However, there was a major public outcry when it became apparent that small businesses were being shortchanged by big companies who swiped much of the $349B funding. In response to this issue, the new Covid-19 relief legislation bars publicly-traded companies from qualifying for the new PPP loans. In addition, those public companies that took PPP loans are advised to pay back.

Government Officials Eligibility and Disclosure:

In a nod to public concerns about government officials unfairly benefitting from PPP loans provision, the new bill enacts some eligibility limitations and disclosure requirements for government officials. For example, if the President, Vice President, the head of an Executive department, or a Member of Congress (or their spouses) receives a PPP loan, disclosure is required within 30 days of forgiveness. Those folks are also barred from receiving a loan in the future.

2. PPP Round 2 (PPP2)

In addition to fixing problems from the initial PPP, the Covid-19 relief legislation allocates $284.45B for the PPP Second Draw. The new round of PPP contains many similarities to the first round of the PPP but also has several important differences.

Who Is Eligible For PPP Round 2

Eligible Entity

The first eligibility requirement for PPP round 2 is whether the PPP borrower is an “eligible entity”. The Covid-19 relief legislation defines an eligible entity as a Schedule C taxpayer, an LLC or other entity treated as an S corporation or partnership that meets the following requirements:

  • The borrower must employ no more than 300 employees, or meet an alternative size standard.

Necessity Test

To be eligible for the PPP round 2, a business must pass the necessity test – meaning that the loan must be necessary to support the ongoing operations of the business. If the business has been profitable or at least broke even and fully expects to survive without assistance, until when the virus clears, then the loan may not be sufficiently “necessary” to justify taking it. To prove necessity, borrowers must meet the following:

  • The borrower must demonstrate that there was a 30% reduction from the gross receipts of the entity during the same quarter in 2019.
  • For the purposes of this 30% rule, gross receipts will include all revenues from the normal operation of the business before subtraction of expenses but will not include amounts borrowed, including amounts received for PPP loans.

The SBA announced that it will not question the necessity for loans under $2 million. However it is important to note that other agencies may.

Chinese Entities

One of the problems with the initial PPP offering that caused public outcry was that foreign-owned companies were awarded loans. In an effort to curb this from occurring this time around, Congress inserted a language that bars publicly-traded businesses and entities affiliated with the People’s Republic of China from qualifying for a PPP round 2 loan. It is unclear whether that list includes companies with ties to other hostile countries such as Russia, North Korea, or Iran.

Bankrupt Companies

As with the initial PPP, bankruptcy rules will continue to apply. This means companies in bankruptcy will not be able to apply for the new PPP round 2 loan based on the provisions of the Covid-19 relief legislation.

501(c)(6) Organizations

PPP2 also makes the forgivable loans available to Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations”, provided they do not receive more than 15% of receipts from lobbying and that they meet the other requirements. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.

Conditions For Previous vs New Borrowers

Previous Borrowers:

Specifically, previous PPP recipients may apply for another PPP loan of up to $2 million, provided they:

  • Have 300 or fewer employees.
  • Have used or will use the full amount of their first PPP loan.
  • Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
  • Additional Loans Cannot Exceed $2,000,000 per Borrower.
  • Borrowers will be required to wait 90 days between the first PPP loan and the second.

New Borrowers:

PPP2 will also permit first-time borrowers from the following groups:

  • Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
  • Sole proprietors, independent contractors, and eligible self-employed individuals.
  • Not-for-profits, including churches.
  • Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.

Terms of PPP2

How Much Can You Borrow?

  • Accommodation and Food Services: Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5 times their average monthly payroll costs.
  • General Businesses: Most businesses can borrow up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year.
  • Seasonal Employers: Seasonal employers may calculate their maximum loan amount based on a 12-week period beginning February 15, 2019 through February 15, 2020. A seasonal employer is one who operates for no more than seven months in a year, or earned no more than 1/3 of its receipts in any six months in the prior calendar year.
Is The New PPP Loan Tax Deductible?

To avoid confusion about the deductibility of PPP loans as with the CARES Act, Congress made it clear this time that deductions are allowable for expenses paid with the proceeds of a forgiven PPP loan.

Will The New PPP Loan Be Forgivable?

  • Eligible Expenses: As with PPP1, the costs eligible for loan forgiveness in PPP round 2 include payroll, rent, covered mortgage interest, and utilities. The definition of qualified expenses has also expanded to cover the following:

Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.

Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.

Covered operating costs such as software and cloud computing services and accounting needs.
Costs related to “property damage and vandalism or looting due to public disturbances” that occurred during 2020 not covered by insurance.

  • Covered period: The time period to spend funds on qualified expenses for purposes of forgiveness can be between 8 weeks to 24 weeks. Borrowers get to choose.

Please note that the Covid-19 relief legislation also repeals the requirement that borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.

PPP Forgiveness and The Future

The deadline to apply for the PPP was August 8, 2020 and banks are now starting the forgiveness process. Should you start applying for forgiveness or should you wait? Find the answers here!

Read More »

PPP Forgiveness and The Future

The deadline to apply for the PPP was August 8, 2020 and banks are now starting the forgiveness process. Should you start applying for forgiveness or should you wait? Find the answers here!

Read More »

How To Apply For Forgiveness

Under the new COVID-19 relief bill, PPP borrowers who received less than $150,000 in PPP loans during the first round will now only have to submit a one-page application for forgiveness
Specifically, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.

Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.

3. A More Targeted New Round of EIDL

In this proposed new legislation, there will be a new round of EIDL loan advances to the tune of $20 billion dollars, These will go first to the people and businesses who need them the most, based upon $1,000 per employee and not exceeding $10,000 per borrower.

Who Is Eligible To Apply For EIDL

To qualify for the full $10,000 EIDL grant, a business must:

  • Be located in a low-income community, and
  • Have suffered an economic loss greater than 30%, and
  • Employ not more than 300 employees

In addition, the business must qualify as an eligible entity as defined in the CARES Act:

  • A small business, cooperative, ESOP Tribal concern, with fewer than 300 employees
  • An individual who operates under as a sole proprietorship, with or without employees, or as an independent contractor; or
  • A private non-profit or small agricultural cooperative.
  • The business must have been in operation by January 31, 2020
  • The business must be directly affected by COVID-19

Is EIDL Taxable?

The Covid-19 relief legislation clarifies that EIDL grants are not taxable. Businesses who receive them will not be denied a tax deduction for qualified expenses paid for with those funds, In addition, the EIDL grants will not be deducted from PPP for loan forgiveness purposes.

How To Apply For EIDL?

For those who received EIDL before, the Covid-19 relief legislation requires the SBA Administrator to notify those who received a previous EIDL grant as well as those who applied but did not get a grant because funds were exhausted. As for new applicants, the SBA will release guidance and will open up the application portal at SBA.gov.

How To Get Help With Documentation, Application or Forgiveness

Missteps in maintaining documentation or in applying can be costly. If you need help to make sure that you avoid such mistakes, our experienced CPAs at Valor CPAs can help. Schedule a FREE consultation call here with one of our experienced CPAs at a time convenient to you.

Something Wasn't Clear?

Feel free to contact me, and I will be more than happy to answer all of your questions.

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