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Important PPP Changes and Guidance


On January 6, 2021 the SBA issued approximately 120 pages of new regulations regarding PPP loans. 
We have updated the below article on PPP Changes with significant new details, including:
  • New methods to calculate a 25% reduction in gross receipts
  • Clarifications regarding eligibility for second draw PPP loans
  • Denial of loan eligibility for those in bankruptcy
  • Borrowers can amend their initial loan application if they are eligible to receive more because of rule changes, but not if they simply miscalculated the loan amount they were eligible for.
  • The Interim Final Rules do not affect forgiven loans unless specifically stated otherwise
  • IRS Revenue Ruling 2021-02 clarifies tax treatment of PPP loans
  • No new guidance on the Employee Retention Tax Credit
  • On January 8th, the SBA released a revised PPP application form for first time borrowers and a new application for second draw borrowers.
  • The new simplified PPP forgiveness application for loans under $150,000 is not yet released but due the 3rd week of January.

The “Economic Aid Act” or Consolidated Appropriations Act of 2021  funds the government through most of 2021 and provides COVID-19 relief including extending federal unemployment benefits, providing for $600 cash payments to Americans, extending eviction moratoriums, providing housing assistance payments, funding food assistance programs, and creating a second round of Paycheck Protection Program (“PPP”) loans for small businesses.

The new law includes welcomed additions, clarifications, and changes to the PPP. The first round of the program featured a number of hurdles and questions so this second round will serve as an opportunity for many first time borrowers who missed out on the initial process to participate and for many repeat borrowers to continue funding their payrolls with forgivable loans.

Here’s what businesses and not-for-profit organizations need to know:

Expenses Paid with Forgiven PPP Loans Will Be Deductible

In May, the IRS issued Revenue Notice 2020-32, which took the position that expenses paid for with forgiven loans would not be deductible. In relevant part, the new law states:

“(2) no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1).”

In addition, the Act provides that owners of S corporations and partnerships will receive a step-up in basis attributable to the “tax-exempt income” that results from PPP loan forgiveness.  Unfortunately, for most borrowers this increase in basis will not occur until the 2021 tax year when forgiveness is confirmed by the SBA.  Therefore, owners wishing to have losses flow through on their personal tax returns may not have sufficient basis to take the loss in 2020 unless contributions are made to the entity prior to year-end, and the loss will remain suspended until basis is increased in 2021 after the loan is forgiven.

PPP Loan Recipients Now Eligible To Receive the Employee Retention Credit

Under the CARES Act, PPP loan recipients were not eligible to receive employee retention tax credits because both the loans and the credit were intended to be expended on employee payroll, so Congress made the two mutually exclusive.

Now, however, the eligibility requirements for the Retention Credit have been further reduced on top of PPP loan recipients becoming eligible for the Credit.

The one caveat for borrowers who receive PPP loans as well as the Retention Credit is that they may only claim the Credit on employee wages NOT paid with PPP funds.

To be eligible for the Employee Retention Credit an employer must either (1) have the operation of the business fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19 OR (2) suffer a 20% reduction in gross receipts when comparing any quarter in 2020 to the same quarter in 2019.

Second Draw – Eligible Recipients May Receive a Second PPP Loan

The Act now permits repeat borrowers to receive a PPP loan if they meet the requirements of an “eligible recipient.”  NOTE:  In order to qualify for a second draw PPP loan, a borrower must have received a PPP loan during the first round.  Borrowers seeking their first PPP loan will be eligible based upon the requirements previously set forth by the CARES Act and restated in the January 6th Interim Final Rules.

An “eligible recipient” is defined as “any business concern, nonprofit organization, housing cooperative, veterans organization, Tribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative” that meets the following three requirements:

  • Employs not more than 300 employees.  The January 6th Interim Final Rules further clarified that North American Industry Classification System (“NAICS”) Code 72 entities (food service providers) and eligible news organizations with more than one physical location may have up to 500 employees.
  • Has or will use the full amount of their first PPP loanThe January 6th Interim Final Rules confirmed that a borrower applying for a second draw loan must certify that, before the Second Draw Loan is disbursed (but not necessarily at the time of application), they will have used the full loan amount (including any increase) of the First Draw Paycheck Protection Program Loan only for eligible expenses.
  • 25% reduction. Had gross receipts during the first, second, third, or, only with respect to an application submitted on or after January 1, 2021, fourth quarter in 2020 that demonstrate not less than a 25 percent reduction from the gross receipts of the entity during the same quarter in 2019.

The January 6th Interim Final Rules state that the borrower must demonstrate that they suffered a 25% reduction in gross receipts during one quarter in calendar year 2020 when compared to the corresponding quarter in calendar year 2019. For the purposes of this 25% 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 and forgiven for PPP loans. The IFRs further provide that borrowers who were in operation for all 4 quarters in 2019 may compare their calendar year 2019 gross receipts to calendar year 2020 gross receipts in order to determine if they satisfy the 25% reduction test.

    • For purposes of the above 25% reduction in gross receipts test, borrowers who were not in business during the first, second, or third quarter of 2019 (January 1 – September 30), but were in business during the fourth quarter of 2019 (October 1 – December 31), can compare the first, second, or third quarter of 2020 (January 1 – September 30) to the fourth quarter of 2019.
    • If the entity was not in business during 2019 but was in business by February 15, 2020, then such borrower can compare their gross receipts during the second or third quarter of 2020 (April 1 – June 30) to the first quarter of 2020 (January 1 – March 30) to see if they qualify.
    • For purpose of the above tests, non-profit entities can compare their gross receipts in the first, second, or third quarter of 2020 to gross receipts in the same quarter of 2019.

Provided they meet the requirements above, an “eligible recipient” will also still need to satisfy the “Necessity Test.”  Borrowers were required to certify in good faith on their initial PPP loan application that the loan is “necessary to support the on-going operations of the applicant.” This “necessity requirement” still appears to be in place following the passage of this Act.

It may be a stretch for businesses that have survived one or two difficult quarters to state that the loan is “necessary” for the ongoing operation of the business, even though the business could reasonably argue that they need the loan.

The SBA’s Interim Final Rule released on January 6th reinforced their stance that the necessity certification for a borrower’s loan would not be questioned for either the first or second round of loans, provided the amount of each loan was less than $150,000.

IMPORTANT NOTE: The PPP forgivable loan program reopens January 11, 2021.  CLICK HERE for details.  (Check with your lender for more information.) In addition, you are not required to have applied for PPP loan forgiveness of your first PPP loan at the time of applying for a second draw PPP loan.

Increased Maximum Amount of New PPP Loans For Seasonal Employers, New Entities, and Businesses With More Than One Physical Location

For seasonal employers, the maximum amount of new PPP loans is based upon 2.5 times the average monthly payroll costs for the 12-week that begins February 15, 2019 or March 1, 2019 and ends February 15th, 2020. The loan can be for up to, but not exceeding, $2 million.

For new entities, the maximum amount of new PPP loans is based upon at the election of the borrower the greater of

  • 2.5 times the average monthly payroll costs for any one year period before the date on which the loan is made or
  • the average monthly payroll costs for the 2019 calendar year multiplied by 2.5, but not exceeding $2 million in either case.

For businesses with more than one physical location, the maximum amount of new PPP loan will be as follows:

  • $2,000,000 as the total amount of all covered loans; and
  • in applying this paragraph, the Administrator shall substitute ‘not more than 300 employees per physical location’ for the term ‘not more than 500 employees per physical location’ in paragraph (36)(D)(iii).

Maximum Amount of New PPP Loans For NAICS Code 72 Borrowers (Primarily Food, Beverage and Hospitality Related)

Under the new law most borrowers may receive 2.5 times the average total monthly payroll costs incurred or paid during the 1-year period before the date on which the loan is made or, at the election of the borrower, calendar year 2019. This amount may not exceed $2,000,000.

This is not the case for NAICS Code 72 borrowers. For these borrowers, the maximum loan amount they are eligible to receive is based upon 3.5 times the average total monthly payroll costs incurred or paid during the 1-year period before the date on which the loan is made or, at the election of the borrower, calendar year 2019, as opposed to the 2.5 multiplier that applies to all other borrowers.

That means these borrowers are eligible to receive 40% more than their counterparts in other industries. View the chart below to see if your business falls into this category.

Regarding seasonal employers and NAICS Code 72 entities, the January 6th Interim Final Rules recognized the fact that there may be some overlap in these industries and clarified that a business that qualifies as both a seasonal employer and a NAICS Code 72 entity may calculate their payroll costs used to determine their loan amount based upon either the seasonal employer payroll costs formula, or the standard formula used to calculate payroll costs for every other type of borrower, while still being allowed to utilize the 3.5 times multiplier that is applied to NAICS Code 72 entities under the new Act.

Chinese Owned Entities Are Ineligible For a Second Draw PPP Loan

Publicly traded businesses and entities affiliated with the People’s Republic of China are on the list of entities that cannot qualify for a new PPP loan. China is the only restricted country included in the new Act.

Additional Loans Cannot Exceed $2,000,000 per Borrower–90 Day Wait Between Loans

The loan amounts for a vast majority of borrowers will be almost identical to what the borrower received for their original PPP loan.  This second round of funding, however, is capped at $2 million per borrower rather than $10 million under the initial round of PPP loans in the CARES Act.  For those few borrowers who received a PPP loan within the last 90 days, the new Act requires that the aggregate of the new and old loan will not exceed $10 million.

No Enforcement Action Against Banks

The Act provides that there will be no “enforcement action” with respect to lenders.

It now Appears that Loans will NOT be Permitted for Borrowers in Bankruptcy

The January 6th Interim Finals Rules provide the followng:  “If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.”  The January 6th Interim Final Rules also provide that if your business is permanently closed then you will not be eligible to receive a PPP loan. 

This  determination seems contrary to what Congress initially permitted under the new Act. This rule could change again under the new administration and once the next session of Congress begins.

Simplified Forgiveness Application for Loans Under $150,000

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, but all of the same rules apply.   The Treasury has 24 days from the date the Act was signed to create and release the new form.  It is not available yet, but is expected later in January.

Eligible recipients will only be required to provide—

  1. a description of the number of employees the eligible recipient was able to retain because of the covered loan;
  2. the estimated amount of the covered loan amount spent by the eligible recipient on payroll costs; and
  3. the total loan value;

Borrowers will still need to complete all certifications and retain related employment records for a 4-year period following submission of the form; and other pertinent records for a 3-year period following submission of the form.

PPP Borrowers Can Select A Covered Period of a minimum of 8-Weeks up to 24-Weeks

Borrowers are now able to choose a covered period that can be as short as 8 weeks and as long as 24 weeks immediately after the second loan is received, during which the borrower is required to spend a sufficient amount on qualified expenses to receive forgiveness.  This period thus ends on any day selected by the borrower, but no earlier than 8-weeks from the date the loan proceeds are received and no later than 24 weeks after such date of origination.

This change will enable borrowers to cut off the testing period before having a reduction in workforce that would cause the applicable reduction in workforce penalties to apply, as long as the workforce is at its pre-February 15 levels on the last day of the Covered Period.

In the January 6th Interim Final Rules the SBA eliminated the “alternative covered period” which allowed borrowers to start their covered period on the start date of a payroll period for payroll cost purposes rather than on the date the loan was received. The covered period is now strictly any date between 8 and 24 weeks after receipt of the loan.

Owner’s $100,000 Wage Limitation Now Applied On An Annualized Basis

Some borrowers may recall that during PPP round one, when calculating their payroll expenses, an S or C corporation owner’s countable wage was capped at $100,000. This meant that, depending on which covered period the borrower selected (either 8 or 24 weeks exactly), forgiveness for an owner’s compensation would be capped at $15,384 or $46,153 respectively.

Now, however, in recognition of the new rule which allows a borrower to choose any covered period between 8 and 24 weeks long, an owner’s forgivable wage will be applied on an annualized basis. This means that an S or C corp owner who makes $100,000 or more per year will have a forgivable wage amount capped somewhere between $15,384 or $46,153 depending on which day between 8 to 24 weeks the borrower chooses to end their covered period on.

Expanded Eligibility for 501(c)(6) Organizations

Organizations that are classified as a 501(c)(6) will have expanded eligibility to PPP loans.

“Any organization that is described in section 501(c)(6) of the Internal Revenue Code and that is exempt from taxation under section 501(a) of such Code (excluding professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity) shall be eligible to receive a covered loan if—

  • does not receive more than 15 percent of its receipts from lobbying activities;
  • lobbying activities of the organization do not comprise more than 15 percent of the total activities of the organization; and
  • cost of the lobbying activities of the organization did not exceed $1,000,000 during the most recent tax year of the organization that ended prior to February 15, 2020; and
  • employs not more than 300 employees.”

Additional Eligible Expenses That Count Towards Forgiveness

The Act expands on the list of forgivable expenses to now include the following:

  • Covered operations expenditures defined as “a payment for 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 or tracking of supplies, inventory, records and expenses.”
  • Covered property damage cost 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 supplier cost defined as “an expenditure made by an entity to a supplier of goods for the supply of goods that (1) are essential to the operations of the entity at the time at which the expenditure is made; and (2) is made pursuant to a contract, order, or purchase order in effect at any time before the covered period with respect to the applicable covered loan, or with respect to perishable goods in effect before or at any time during the covered period with respect to the applicable covered loan.”
  • Covered worker protection expenditure defined as means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

The Act includes specific examples of what may be included as a Covered Worker Protection Expenditure as well as examples of items that do not qualify for such expense.

Borrowers Can Amend Loan Applications to Request An Increase In Their PPP Loan Amount As A Result of A Rule Change 

The Act requires that the SBA issue guidance to lenders within 17 days to provide a process for borrowers who returned all or part of their PPP loan to reapply for the maximum allowable amount so long as they have not filed for forgiveness. The Act also allows borrowers that would have received an increased loan amount due to changes in interim final rules issued by the SBA or as a result of the Act to reapply for the difference.

The January 6th Interim Final Rule does provide that the following borrowers can reapply or request an increase for their first round loan:

  • Borrowers who returned all of their initial PPP loan amount
  • Borrowers who returned part of their initial PPP loan amount
  • Borrowers who did not accept the full amount of their initial PPP loan

Relief for Schedule F Farmers

The Act includes specific provisions that allow farmers reporting income on a Schedule F to qualify for a PPP loan based on their 2019 Schedule F income in a similar manner that applies to Schedule C taxpayers.

EIDL Advance Non-Taxable and No Longer Reduces PPP Loan Forgiveness 

The Act also replenishes the EIDL Advance fund, which allows businesses suffering a substantial economic injury to apply for an advance that does not need to be repaid or up to $1,000 per employee limited to $10,000 total.

Prior law stated that any EIDL Advance received would reduce PPP Loan Forgiveness, essentially requiring the Advance to be repaid.

The new Act repeals this provision so the receipt of an EIDL Advance will have no impact on PPP loan forgiveness. Borrowers that have already applied for and received loan forgiveness presumably may now amend their application to request that the $10,000 EIDL Advance (or amount actually received) not reduce their forgiveness amount and request repayment.

EIDL Program For Businesses Hardest Hit by the Coronavirus

The Act creates a targeted EIDL program to assist businesses that were hardest hit by the economic impacts of the Coronavirus.  The EIDL program was initially enacted many years ago to provide loans to businesses that have suffered from major storms, droughts, and other federally-declared disasters.  EIDL loans bear interest at 3.75% and come with significant loan program requirements.

Businesses that receive EIDL loans are unable to pay several things without SBA approval, including paying dividends, paying bonuses to any employees, including non-owners, and using EIDL funds for anything other than business purposes.


This new law will provide much needed relief to small businesses affected by COVID-19. In addition to COVID-19 relief, this new law makes a number of important tax changes that we will communicate in separately.

As has been the case with these COVID-19 stimulus acts, there will almost certainly be additional guidance, announcements, and interpretations to come.  We will continue to keep you updated and informed on what you need to know in order to maximize your benefits and make proper financial, tax and business decisions.


Contact your Warady & Davis advisor or our PPP team at 847-267-9600; info@waradydavis.com. You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more.  This information is updated regularly.

SOURCE: SBA, U.S. Treasury and IRS
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