Originally published on Forbes.com.
The army of tax professionals drafted into work as loan consultants by the CARES Act get no recognition in the Continuing Small Business Recovery And Paycheck Protection Act. They might get just a bit of schadenfreude out of it, though. The CARES Act gave the banks a fee as much as 5% of the first round of Paycheck Protection loans with a pretty clear idea that 1% be shared with agents.
The proposed second draw has a 3% maximum fee and no mention of agents. In the first round, the CPAs and EAs were the victims of bank robbery, as many of the banks did not allow agent fees keeping the whole 5%. So maybe there will be some satisfaction that the banks are getting less.
Now that we have covered the really important part, let’s take a closer look at the proposed second round of PPP money.
A Piece Of The Puzzle
The Senate has finally picked up the baton that the House dropped on it with the HEROES Act to craft its own legislation. The Senate bill will be called the HEALS Act (Health, Economic Assistance, Liability Protection and Schools Act), but we are getting it in pieces from different committees.
The Finance Committee has the American Workers, Families and Employers Assistance Act, which has much of what most people were worried about – most notably a second rebate payment remarkably similar to the first one under the CARES Act and a continuation of the federal unemployment supplement at a lower rate, which the New York TimesNYT refers to as a $400 cut.
Kelly Erb has covered AWFE quite thoroughly with Senate CARES Act 2.0 Includes More Stimulus Checks, Unemployment Benefits.
Relevant To Both Rounds
The bill includes improvements to the CARES Act relative to the use and forgivability of Paycheck Protection loans. There is a clarification that group insurance benefits qualify as payroll and covered period can now be between 8 weeks after loan origination and December 31, 2020.
More Things You Can Spend On
The Act would add additional eligible expenses that will be allowable and forgivable. There are “covered operations expenses” – software, cloud computing, and other human resources and accounting needs. “Covered supplier costs” are goods essential to the business that were contracted for prior to February 15, 2020. “Covered worker protection expenditures” includes personal protective equipment and adaptive investments to comply with health and safety guidelines related to COVID-19.
There is an additional category which might be a bit of editorializing. “Property damage costs” are costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.
Forgiveness
The process for applying of forgiveness of PPP loans will be simplified under this bill. Borrowers under $150,000 do not have to submit any documentation other than an attestation of a good faith effort to comply. Of course, they will need to hang onto records in the event of audit. Borrowers who got $150,000 to $2 million don’t have to submit documents either but have a certification requirement.
The Second Draw
Some employers will be able to take a second Paycheck Protection loan. It is a narrower group than the first round under CARES. The employee limit is 300 and the employer must demonstrate a 50% reduction in gross receipts in either the first or second quarter of 2020 relative to the same quarter in 2019.
Publicly-traded businesses and entities affiliated with entities in the People’s Republic of China are excluded as our businesses in financial services that received a first round loan.
Amount Of Loan
Much like CARES the amount of the loan is 2.5 times average monthly payroll cost with allowed adjustments for seasonality. The maximum loan is $2 million. Borrowers that received money in the first round can’t get an aggregate of more than $10 million.
Blessings
The Act conveys a “sense of Congress” that the administration’s take on the eligibility of churches and religious organizations was proper and prohibits the application of regulations otherwise rendering ineligible businesses engaged in teaching, instructing, counseling, or indoctrinating religion.
Forgiveness
Second draw borrowers would eligible for forgiveness to the extent of payroll and other covered expenses incurred before January 1, 2021. The 60/40 allocation between payroll and other expenses will continue.
There Is More
There are more devilish details that I have not addressed in this summary. I was on the phone last night with Lucien Gauthier of The Boston Tax Institute who offers a myriad of courses now over Zoom. He had reworked the schedule based on an extension in the CPE due date from June 30 to September 30 and now has to deal with another change in PPP. He did not sound real happy, but I just heard from him and now he sees it as an opportunity.
The Big Piece Missing
There is nothing in either of the two pieces of HEALS that have been released on deducting expenses that are funded by forgiven PPP loans. The IRS in Notice 2020-32 ruled that the expenses were not deductible, which seemed to contradict what Congress intended when it deemed the forgiveness not taxable.
Clearing that up one way or the other would avoid a lot of litigation in the coming years.
Planning
Earlier this month, I interviewed Heather Bain chair of the Small Business Committee of the Institute of Management Accountants. We were discussing why businesses might want to pass on PPP loans. Given how far in we were into the program I did not find the information that timely, but now with the prospect of a second round it is a different story.
One of the things she mentioned was privacy concerns. And of course we have seen the extensive PPP shaming frenzy that the media engaged in. So that ship had already sailed.
Possibly more important is how the program interacts with other programs and credits. Heather recommends that you don’t just think of PPP as free money, but rather sit down and do some cash flow planning before pulling the trigger on you application. You know what they say. Failing to plan is planning to fail.