$900 Billion COVID Relief for Small Businesses & Loan Forgiveness

Congress approved on Monday a $900 billion covid relief package and $1.4 trillion to fund the government through September 30. The $900 billion covid relief package will deliver aid to small businesses hit by the pandemic, Americans who have lost their jobs during the economic upheaval and health care workers on the front line of the crisis.

The legislation includes a second round of PPP Loans for Small businesses as well as loan-forgiveness rule changes that are favorable to PPP borrowers.

Businesses with a NAICS code beginning in 72 (generally hospitality businesses) may receive up to 3.5 times average monthly payroll costs.

To qualify for a second PPP loan:

  • A small business must have fewer than 300 employees which is down from the 500 employee maximum in the first round. And a small business must have already used or plan to use their original PPP funding. Similar to the original PPP loan program, the small business can use the loan proceeds over a period of 24 weeks and can use the funds for payroll, rent and mortgage expenses.  The bill also adds some new expenses to the list of “qualifying expenses”. These new qualifying expenses include operating expenses, workplace protection costs to protect employees from Covid and covered property damage.
  • A small business must certify that they have had a loss of revenue of 25% or greater.  This is different from the original qualification rules for PPP, which simply required the small business to state that economic uncertainty made the PPP loan necessary. Under the 25% loss of revenue test, the small business will compare their 2020 quarterly revenue against their 1st, 2nd, and 3rd quarters of revenue in 2019.  In order to qualify for the second draw PPP loan, a borrower must be able to show a loss in revenue of 25% or more from at least one quarter of 2020 as compared to that same quarter in 2019.

The second PPP loans are forgivable but must be spent on 60% on payroll costs. Since the loan amount is based on 2.5 months of average payroll, which is 10-11 weeks, and since the small business can use the funds over a 24-week period, it seems likely most small businesses will be able to use 60% of the PPP funds on payroll costs.

The new legislation provides that the forgiven PPP loans will not be taxable to the small business borrower.  This applies to all existing PPP loans under the original CARES Act as well as the new second round of PPP loans. The good news for small businesses is that borrowers can have their PPP loan forgiven and will still be able to deduct their payroll and other qualifying expenses that they used their PPP funds on.