Home Health & Hospice Week

Should you apply for a ‘second draw’ loan?

If you held off on requesting relief for your Paycheck Protection Program loan, it was a good move.

Why? Provisions in the latest COVID-19 relief package signed into law on Dec. 27, 2020, make attaining forgiveness of your PPP loan easier. While 60 percent of your loan still needs to go toward payroll costs if you want full forgiveness, Congress broadened the items that count toward that 60 percent. The Consolidated Appropriations Act, 2021 specifies that “group life, disability, vision, or dental insurance” costs count as payroll costs.

The law also adds a variety of new non-payroll costs that can go toward the other 40 percent. They include costs made to covered suppliers for goods essential to operation; to protect workers; “for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses;” and for “cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.”

Other key changes in the law include:

• Tax improvement. Many, including the lawmakers who wrote and passed the CARES Act, were surprised when the Internal Revenue Service declared some tax-related burdens on PPP funds. “The new law clarifies that the expenses paid with the proceeds of a forgiven PPP loan are deductible, legislatively overruling IRS Notice 2020-32, which disallowed deductions for such expenses,” say attorneys with law firm Greenberg Traurig in a Jan. 4 Alert. “The new law goes further, stating that no tax benefit shall be denied, and no loss carryovers or basis adjustment will be required as a result of the tax-free forgiveness of a PPP loan,” the attorneys explain.

“No amount shall be included in the gross income of a borrower by reason of forgiveness of indebtedness,” the law specifies.

This is “welcome news by businesses and their tax advisors as they complete year-end tax planning in an already unpredictable environment,” notes Emir Hodzic with VonLehman & Co. in online analysis.

“Of course, this was always the intent of the CARES Act even though the IRS had attempted to mitigate the tax benefit to borrowers,” says Morgantown, West Virginia-based home health consulting firm The Health Group in its electronic newsletter.

• Second loans. Entities with 300 employees or less, that have used all their first PPP loan proceeds, and that have had at least a 25 percent drop in revenues from 2019 to 2020 can apply for “second draw” PPP loans, the law says. The application deadline is March 31. “Loans would be limited to $2 million for most borrowers, down from $10 million provided under the CARES Act,” points out The Health Group.

• Loan do-overs. “An eligible recipient that returned all or part of an included covered [PPP] loan … may reapply for a covered loan for an amount equal to the difference between the amount retained and the maximum amount applicable,” the law says. And “an eligible recipient that did not accept the full amount of an included covered [PPP] loan … may request a modification to increase the amount of the covered loan to the maximum amount applicable,” it continues.

What doesn’t seem to be allowed is a redo for your forgiveness application. “The Act provides that its provisions expanding expenses eligible for loan forgiveness will not apply to a borrower that ‘received forgiveness before the date of enactment’ of the Act,” advises law firm Vedder Price in online analysis. “Although the Act is not explicit on this point, it appears … that if a borrower only received a portion of its requested loan forgiveness prior to enactment of the Act, such borrower would not be able to claim the additional covered expenses described above as forgivable expenses.”

Whether a borrower can re-file its pending forgiveness application is a bit less clear. The law “does not specifically address whether a borrower that has filed its loan forgiveness application and is awaiting a forgiveness determination by the SBA may re-file its application to take advantage of the expanded provisions concerning expenses eligible for loan forgiveness,” the Vedder Price attorneys note.

• Covered period options. Borrowers can choose a covered period ending either “8 weeks after … date of origination” or “ending on the date that is 24 weeks after … date of origination,” the law says. “Regardless of the chosen covered period, each borrower must use the full amount of the PPP loan proceeds on eligible expenses during its chosen covered period to be eligible for full loan forgiveness,” advise the Vedder Price attorneys.

• Lower threshold for simplified application. Previously, the Small Business Administration “established a simplified forgiveness application process for certain borrowers with PPP loans under $50,000,” note attorneys Kirstin Salzman, Jessica Zeratsky, and Christopher Peterson with law firm Husch Blackwell in online analysis. “The new stimulus bill establishes a similar simplified forgiveness application process for borrowers with PPP loans under $150,000.”

The certification must be “not more than 1 page in length” and “shall only require the eligible recipient to provide … the number of employees the eligible recipient was able to retain because of the covered loan; … the estimated amount of the covered loan amount spent by the eligible recipient on payroll costs; and … the total loan value,” the law details.

Timeline: SBA is supposed to make that certification form available in 24 days, Salzman, Zeratsky, and Peterson note.

For the other provisions, “the SBA only has until January 6, 2020, to establish implementing regulations to carry out these new PPP provisions,” point out attorneys Jessica Abrahams, Frank Swain, and Michelle Francois with Faegre Drinker in Washington, D.C. But at press time, the SBA had not yet issued the regs.