By now, the Paycheck Protection Program, or PPP, is a familiar term to most Arkansas businesses. Under the CARES Act, an eligible recipient of a PPP loan can receive forgiveness of the loan in an amount equal to the payments made for certain expenses during the covered period, including costs for payroll, rent and utilities. Congress addressed this issue, to a degree, in the CARES Act by providing that the debt discharge of a PPP loan is excluded from the gross income of the business for federal income tax purposes. This was good news to all businesses applying for PPP loans earlier this year.
Subsequently, President Trump signed The Consolidated Appropriations Act, 2021, H.R. 133 on December 27, 2020, after threatening a veto on the bill. So, what should you know about the $2.3 trillion spending bill that is 5,593 pages in length? There is a lot to know, but here are a few highlights.
First, more PPP loan assistance is on the way. $284 billion was dedicated to this new program. If you were rejected in the first round or did not receive funds, this is another chance to apply. Loans are capped at $2 million opposed to $10 million previously. If you received funds previously, you can apply again if you meet certain criteria. To qualify, you must (i) have spent all of the funds from the first loan, (ii) have less than 300 employees and (iii) prove that you lost 25% or more of revenue in any quarter in 2020 either on a quarterly or annual basis.
Second, it clarified some outstanding tax issues related to PPP loans. The bill clarified that gross income should not include any amount that would otherwise arise from the forgiveness of a PPP loan. Likewise, it clarified that deductions are allowed for otherwise deductible expenses paid from proceeds of a PPP loan that is forgiven. This is an important clarification because the IRS previously released guidance saying that a taxpayer computing taxable income for the calendar year could not deduct eligible expenses paid with the PPP funds.
Third, it extended the employer credit for paid sick and family leave. This credit, which was part of the CARES Act, was set to expire on December 31, 2020. The covered period is now extended to March 31, 2021, and applies to compensation paid to a covered employee through June 30, 2021.
Fourth, it will be important for banks to understand that this bill provides for the exemption of supplemental stimulus rebate payments from garnishment with some exceptions. Banks should be prepared to review incoming deposits to identify payments coded similar to federal benefits payments so that these amounts can be protected like other federal benefit payments.
Last, the new law allows debtors filing under the Small Business Reorganization Act of 2019 (the SBRA) to apply to the bankruptcy court for a PPP loan. For the attorneys reading this article, the new provision amends Section 364 of the Bankruptcy Code. This is important because regulations developed after the CARES Act disqualified businesses in bankruptcy from receiving PPP loans. You may recall that the CARES Act increased the debt limitation to qualify under the SBRA from approximately $2.7 million to $7.5 million, meaning that a debtor could file for a much less burdensome restructuring if its total debt was at or under $7.5 million. This increase in debt limitation lapses in March of this year.
Some of the relief offered in this law was much needed and a welcome start to 2021. There are options to obtain relief and assistance for businesses and you should use the tools at your disposal to mitigate the continuing impact of the pandemic.