After months of disagreement, Congress finally approved a second stimulus package on December 20. The COVID-19 relief package, worth $900 billion, includes $284 billion for the popular Paycheck Protection Program (PPP) for small businesses. The loans will provide a chance for businesses hardest hit by the coronavirus pandemic to stay open.
There are some changes affecting who will be eligible for this round of PPP loans, but the criteria for PPP loan forgiveness and how borrowers can avail themselves to it are pretty similar to the first round.
The new stimulus aims at better distribution of PPP loans.
The PPP provides for forgivable loans small businesses may use to pay their employees during the COVID-19 crisis. This program was created under the original Coronavirus Aid, Relief, and Economic Security (CARES) Act in March. PPP loans are eligible to be forgiven if certain conditions are met.
The new package provides additional funding to businesses that did not receive PPP money in the first round. It also allows a second chance to businesses under some conditions. The new PPP loans also tend to correct a number of problems PPP borrowers previously had.
There are some changes to who qualifies for PPP loans this time.
Both old and new borrowers can receive the PPP loan if they meet the requirements of an “eligible entity,” including:
- The borrower must demonstrate a 30 percent reduction from gross receipts for a quarter as compared to the same quarter in 2019.
- The borrowing businesses should have lower than 300 employees or meet an alternative size standard.
For seasonal employers, the maximum amount of PPP loans is based on the average monthly payroll costs for a 12-week period selected by the borrower.
New entities can qualify for PPP loans based on their average monthly payroll costs multiplied by 2.5. The loan amount, however, cannot exceed $2 million. Those in the restaurant industry can get up to 3.5 times their average payroll cost.
Borrowers who are owned 20 percent or more by “Chinese entities” are not allowed to receive a second PPP loan.
The cap for the second round of funding is set at a lower $2 million, in contrast to first round’s maximum of $10 million.
To qualify for PPP loan forgiveness, most of the money must be spent on payroll.
The SBA (Small Business Administration) will forgive loans of PPP loan borrowers if certain criteria are met. These include:
Using the funds for eligible expenses, including payroll costs, payments on business mortgage interest payments, rent, or utilities during the 8- or 24-week period after disbursement. At least 60 percent of the loan must be used for payroll costs.
Employers must try to maintain employment and pay similar to their pre-pandemic levels.
The borrower can apply for forgiveness after it has used all the funds up until the maturity date of the loan. If businesses submit loan forgiveness applications within 10 months of their loan being used, they are not required to make any repayments.
Borrowers are required to fill out and submit a loan forgiveness application to the financial institution from which they received their PPP loan.
The tax treatment for the PPP loans has also been corrected in the second round. While the expenses incurred to get a PPP loan will be tax-deductible, the forgiveness of the PPP loan will not be included in income.