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February 11, 2021 | Covid-19 | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis

PPP Round Three Loans: Significant Changes and How to Leverage Them for Operational Expenses

On December 27, 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was signed into law, and within its 5,593 pages (!), the Paycheck Protection Program was renewed with an additional $284.45 billion in available loans. It was easy to miss some key changes made to the program, and this blog post will review the changes of highest interest to HR and Payroll professionals.

According to the Small Business Administration (SBA), for this new round of PPP loans, and as of February 7, 2021, $100.9 billion of the new $284.4 billion allocation, or 35.5 percent, has been loaned, leaving more than $183 billion still available to be loaned. Lending authority will expire March 31, 2021 or when all funding has been exhausted, whichever comes first.

A Second Chance

The original PPP rules for employer eligibility are mostly unchanged in this third round of funding, with one exception: in 2021, public companies are no longer eligible for these loans. Other eligibility rules include:

  • Companies must have no more than 500 employees at all locations,
  • Hospitality firms (NAICS code classification beginning with “72” such as restaurants and hotels) must have no more than 500 employees per location,
  • The maximum loan amount is generally 2.5 times the average total monthly payroll costs for a designated measurement period, but no more than $10 million.

However, this third round of PPP funding permits companies which took a previous PPP loan to take a second one, called a “second draw” loan. These second draw loans are subject to additional restrictions:

  • The employer must have fully spent out all proceeds from their first PPP loan, or expect to spend it out in full by the second draw disbursement date, and have spent 100% of the proceeds on eligible expenses, although they need not have completed their forgiveness application,
  • Companies must have no more than 300 employees, reduced from the 500 headcount applied to first draw loans (or 300 employees per location for NAICS “Sector 72” hospitality employers),
  • Companies must have experienced a quarter-on-quarter revenue reduction of 25% or more in any quarter of 2020 as compared with the same quarter in 2019. Added by the IRS in the Interim Final Rule, is the ability to use a full-year 2020 vs. 2019 comparison, reflecting gross annual receipts reduced by at least 25%,
  • The maximum loan amount is calculated the same way that first draw loans are calculated, but allows for 3.5 times average monthly payroll expenses for Sector 72 hospitality borrowers (vs. 2.5 times for all other companies). Additionally, there is a reduced cap of $2 million (vs. $10 million), or $4 million aggregate to all members of a single controlled group, and
  • Companies must not have been created or organized, nor have significant operations in the People’s Republic of China or Special Administrative Region of Hong Kong, nor have directors who are residents of the PRC.

Highly Unique Tax Treatment

Using the same dollar of corporate expenditure to achieve two tax benefits under different sections of the Internal Revenue Code is often referred to as “double-dipping.” The IRS’s rule against “double-dipping” is a hallmark of the Code, and usually inviolate. In the case of the Paycheck Protection Program, the rule against double-dipping in 2020 has meant, for example, a prohibition on an employer participating in both the PPP and the Employee Retention Tax Credit (“ERC”) during the same time period. Since PPP loan proceeds enjoy a run-out, or “covered period” of the employer’s choice ranging from 8 to 24 weeks, this has been an impediment in the past. And the CAA also renewed and sweetened the terms of the ERC, making both programs attractive to many employers.

The new PPP rules for 2021 under the CAA now explicitly permit an employer to participate in both the ERC and the PPP for the same covered period, provided that the same expense dollars (payroll, employee benefits, etc.) are not applied to both programs.

Of even greater import to employers, and a true “first” in recent memory, Section 276 of the CAA explicitly allows employers to take expense deductions for payroll and related expenses paid with PPP loan proceeds that have been forgiven! With the maximum corporate tax rate in the U.S. currently at 21 percent, this gives corporate PPP borrowers a potential $1.21 bottom-line positive impact for each dollar borrowed.

Example: If an employer borrows $5 million in 2021 in a new first draw PPP loan, qualifies every dollar for forgiveness, and therefore spent the money only on deductible business expenses, they will receive a potential $1.05 million in avoided corporate income tax on top of $5 million dollars of the equivalent of government “grant” money.

See this SBA article for the complete details.

Additional Expenses Eligible for Forgiveness

Another exciting PPP change for employers under the CAA is the expansion of the categories of expenditure, both payroll related and non-payroll related, that are eligible for forgiveness.

Payroll related expenses eligible for forgiveness under the PPP have always included virtually all types of compensation (but only up to $100,000 annually per employee pro-rated for the coverage period), as well as the employer share of certain benefits costs, such as retirement plans and healthcare coverage. Added to this list under the CAA are employer-paid premiums for other health and welfare plans, such as disability, life, and standalone vision and dental plans.

Non-payroll related expenses eligible for forgiveness under the PPP have always included mortgage interest, rent, utilities and certain other expenses related to interest and supplier cost obligations incurred by an employer prior to February 15, 2020.

Added to this list under the CAA are:

  • Covered property damage costs from public disturbances in 2020 not reimbursed by insurance,
  • Covered worker protection expenditures (related to COVID prevention measures), such as ventilation systems, physical barriers, drive through facilities, personal protective equipment, employee screening equipment, and
  • Covered operational expenses – payments related to any business software or cloud computing service facilitating business operations, product or service delivery. Specifically cited in the law is software used for payroll, HR, sales, billing, accounting and supply chain functions.

New Streamlined Forgiveness Process

Finally, in response to loud feedback from employers around the country, the CAA steps up to the issue of the complexity of calculating, applying for, and achieving forgiveness under the PPP. A new, streamlined forgiveness application process is available for borrowers of $150,000 or less. The new forgiveness application consists of documentation of: (a) the number of employees retained through the covered period of the loan, (b) the estimated total qualified payroll costs incurred during that period, and (c) the total loan amount. No documentation will be due with the application, but borrowers will be required to retain such documentation for four years for payroll and employment records, and three years for all other records, in case of audit.

This new forgiveness process would be available to all new borrowers and retroactive for prior borrowers (2020 PPP loans) who haven’t already received forgiveness.


Note: This blog post highlights only select changes to the PPP under the Consolidated Appropriations Act of 2021. It is not intended to be a complete review of the terms of the PPP program. For a reliable set of resources to learn more about the PPP, including downloadable assets such as loan amount and forgiveness calculators, the American Institute of Certified Public Accountants (AICPA) maintains a dedicated PPP site with useful information of all kinds.

Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)