JANUARY 13, 2021 – FIRST DRAW PPP LOAN INCREASES

This procedural notice lays out instances where a First Draw PPP Loan that was approved on or before August 8, 2020 is eligible for a loan increase on that First Draw loan. None of the borrowers listed below are eligible for an increase if the SBA has remitted a forgiveness payment to the lender. The borrower may still be eligible for a Second Draw loan. The borrower must provide documentation to the lender.

Partnerships

If the partnership excluded amounts for partner compensation, then the loan may be increased.

Seasonal Employers

Seasonal employers are allowed to use “the average total monthly payments for any 12-weeek period selected by the employer beginning February 15, 2019 and ending February 15, 2020”. Previously, seasonal employers had to use an average between May 1, 2019 and September 15, 2019, as an alternate method to using 2019.

Farmers and Ranchers

Farmers and ranchers are now allowed to use gross receipts as opposed to net profit to calculate their maximum loan.

Other Eligible Borrowers

There is also increase relief for the following categories of borrowers:

• Borrowers that fully repaid the loan
• Borrowers that partially repaid the loan
• Borrowers that did not accept the full amount of the loan.

JANUARY 15, 2021 – PPP EXCESS LOAN AMOUNT ERRORS

This procedural notice states “An excess loan amount error is a borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act. An excess loan amount error does not include a knowing misstatement. Knowing misstatements may result in additional action, such as charges for fraud.”

A borrower cannot receive forgiveness on any amount above their maximum whether the error was a borrower or lender error.

JANUARY 15, 2021 – PPP RESUBMISSIONOF LOAN FORGIVENESS USING FORM 3508S

Form 3508S is a simplified 1-page forgiveness form for borrowers with original loan balances of $150,000 or less. Form 3508S requires virtually no documentation to be submitted with the application. Borrowers must retain payroll records for 4 years and other expense records for 3 years in case the SBA decides to audit the forgiveness application. Eligible borrowers that applied for forgiveness using the more complicated Forms 3508EZ or 3508 may resubmit using the simplified form if the SBA has not notified the lender of a final loan decision or remitted payment to the lender.

January 17, 2021 – MAX FIRST DRAW LOANS AND DOCUMENTATION REQUIRED

This guidance reiterates the maximum loan calculations and documentation required by the following borrowers:

• Self-employed individuals with no employees
• Self-employed individuals with employees
• Farmers and Ranchers
• Partnerships
• S corporations
• C corporations

Documentation Required

• You must provide proof of payroll by furnishing Forms 941 (or other tax forms containing similar information), state unemployment insurance forms along with evidence of any retirement and health insurance contributions. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided as evidence that you were in business as of February 15, 2020.
• Self-employed individuals must provide Form Schedule C for either 2019 or 2020 as well as a 2020 invoice or bank statement to establish you were in business as of February 15, 2020. Self-employed individuals will also have to provide Forms 941, state unemployment insurance forms and evidence of retirement or health insurance contributions if they have any employees.
• Farmers and ranchers furnish the same information as self-employed individuals except they use Schedule F instead of Schedule C. Keep in mind they can use the gross receipts, not the net profit (self-employed individuals must use net profit) plus the same expenses for employees as listed above. If farmers and ranchers have employees, they must provide the same information as mentioned above.
• Partnerships would provide the same information as above for employees (Forms 941, state unemployment insurance forms and retirement and health insurance contributions). Additionally, they add the net earnings from self-employment reduced by section 179 expenses claimed, unreimbursed partnerships expenses claimed and depletion on oil and gas properties multiplied by 92.35%, up to a maximum of $100,000 per partner. Partnerships must provide Form 1065 (including K-1s) in addition to the required documents for employees.
• Keep in mind more than 2% shareholders of S corporations have their health insurance added to their payroll and the maximum allowed is $100,000. Any other employee is allowed a $100,000 maximum payroll amount plus health and retirement benefits. Self-employed individuals, farmers and ranchers and partners in partnerships or LLCs are not allowed an additional amount for health benefits or retirement plan contributions.

JANUARY 19, 2021 – CALCULATING REVENUE REDUCTION FOR SECOND DRAW LOANS

This guidance is to assist businesses in calculating their revenue reduction and payroll costs (and the relevant documentation required) for determining eligibility of Second Draw Loans.

Gross receipts are defined as:

For-Profit Business

“Gross receipts generally are all revenue in whatever form received or accrued (in accordance with the entity’s accounting method, i.e., accrual or cash) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms carry the definitions used and reported on IRS tax return forms.

Gross receipts do not include the following:

• taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers (this does not include taxes levied on the concern or its employees).
• proceeds from transactions between a concern and its domestic or foreign affiliates; and
• amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.” In other words, cost of goods sold does not reduce gross receipts.

Not-for-Profit Businesses

“Gross receipts means gross receipts within the meaning of section 6033 of the Internal Revenue Code of 1986, which is the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes, but is not limited to:

• the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts,
• the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts,
• gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T),
• the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and
• the gross amount received as investment income, such as interest, dividends, rents, and royalties.

Gross receipts of a borrower’s affiliates (unless a waiver of affiliation applies) are calculated by adding the gross receipts of the business concern with the gross receipts of each affiliate.”

PPP Loan Proceeds Forgiven and EIDL Advances

Neither of these items is included in gross receipts for purposes of the 25% revenue reduction calculation.

Periods Allowed for 25% Revenue Reduction

Borrower may use any 2020 quarter where they can show at least a 25% drop in revenue compared to the same quarter in 2019. The borrower may also compare annual gross receipts of 2020 to 2019 if they were in business in 2019.

There are additional rules outlined for businesses that opened subsequent to January 1, 2019 and for those that opened subsequent to January 1, 2020 but prior to February 15, 2020.

Documentation Required to Substantiate 25% Revenue Reduction

• Quarterly financial statements for the entity. If the financial statements are not audited, the Applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the Applicant must annotate which line item(s) constitute gross receipts.
• Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions).
• Annual IRS income tax filings of the entity (required if using an annual reference period). If the entity has not yet filed a tax return for 2020, the Applicant must fill out the return forms, compute the relevant gross receipts value, and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax return.

When to Furnish Documentation

For loans greater than $150,000 documentation must be provided with the Second Draw application. Loans of $150,000 or less must provide documentation on or before applying for forgiveness but can provide it with it’s application.

Maximum Loan Amount

The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred multiplied by 2.5 or $2 million. (Remember that First Draw PPP loans could be up to $10 million.) The borrower has the option to use payroll costs of 2019, 2020 or during the 1-year period before the date on which the loan is made. There are some special rules for seasonal employers, which I do not cover in this writing.

There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll or $2,000,000.

The reason for the additional payroll of hotels, motels and restaurants is because these groups of businesses were some of the hardest hit economically by the pandemic.

JANUARY 19, 2021 – ADDITIONAL ITEMS RELEASED

Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act

This is a long (62 pages) Interim Final Rule that does just as the name suggests. It provides a more detailed look at the forgiveness requirements and procedures and is beyond the scope of this writing.

Revised Forgiveness Forms are Released.

Form 3508S – for borrowers with original loan balances of $150,000 or less

Form 3508EZ – for borrowers of more than $150,000 that meet one of the two following conditions:

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. (For purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.).

AND

The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.

• Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the Covered Period).
• Also ignore reductions in an employee’s hours that the Borrower offered to restore, and the employee refused.

OR

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period compared to the most recent full quarter before the Covered Period. (For purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000,).

AND

The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the Covered Period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Form 3508 – for borrowers not eligible to file Form 3508S or 3508EZ.

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Jeff Skolnick, CPA, M.S. Taxation