The Act accomplishes significant relief objectives, many of which are positive developments for small businesses in the promotional products industry. The Act includes an additional $284 billion for the Paycheck Protection Program (PPP) that was created in the CARES Act that was enacted in the Spring of 2020 as the pandemic unfolded in the U.S. PPP loans can be fully forgiven if eligible borrowers keep employees on their payrolls, and follow other rules outlined by the PPP loan program and Small Business Administration (SBA) regulations. The Act also creates a second loan under the Paycheck Protection Program, called a second draw. The Act also approves additional business expenses that are allowed to be paid for with PPP loan funds. The Act also sets new rules establishing a simplified forgiveness process for loans under $150,000, which is a category that likely comprises a significant number of PPP loans taken out by small businesses. There are also important changes to a variety of tax credits, especially the employee retention tax credit. This is all significant for small businesses in the promotional products industry because the “eligible entities” for PPP loans include self-employed individuals, sole proprietors, and independent contractors. Anyone who falls under these categories can apply for and receive their own PPP loan.

The Act authorizes additional operations expenditures that can be covered with PPP funds. These include business software and cloud computing. There are also some covered property damage costs, related to damage caused by public disturbances.

The Act also authorizes supplier costs as an appropriate expenditure for use of PPP loan proceeds. These approved costs refer to expenditures made for the supply of goods that are essential to the operations of the borrower when the expenditures are made. These expenses must be made pursuant to a contract, an order, or a purchase order that was in effect before the covered period for the applicable PPP loan.

The Act also includes a worker protection expenditure which covers Personal Protective Equipment, as well as investments that help the borrower comply with federal or state health guidelines.

These supplier expenses refer to operational items a company needs to run its business, such as the equipment and supplies used in daily operations. These new changes apply to all PPP loans. Thus, whether a company already has a PPP loan, or intends to apply for one, these new covered expenses are available for loan forgiveness purposes. Even though these new business expenses are eligible for forgiveness, the 60/40 rule still applies. This means 60 percent of PPP loan funds must still be spent on payroll to qualify for full forgiveness, and other approved expenses must comprise 40 percent or less of the loan funds’ usage for those same forgiveness purposes.

Another significant provision in the Act is that the borrower can deduct business expenses that were paid for with forgiven PPP loans. This was apparently Congress’ original intent with the CARES Act, however, the IRS released guidance nullifying this intent after the CARES Act was passed. Congress cured the conflict through this recently enacted legislation and confirmed that borrowers can deduct business expenses that were paid for with forgiven PPP loan funds.

Under the Act the covered period applicable for loan forgiveness purposes is the time frame between the date on which a loan is originated and the end of between 8 and 24 weeks, depending on the borrower’s selection. The borrower chooses the covered period. The Act also created a simplified forgiveness process for PPP loans under $150,000, which is a provision that PPAI, along with several coalition partners advocated for after the CARES Act was enacted. With this streamlined forgiveness feature, a PPP loan borrower may receive forgiveness if he or she signs and submits a one-page certification that outlines three things:

• The number of employees the borrower was able to retain, and
• The total loan amount, and
• The estimated total amount of the loan that was spent on payroll costs.

The borrower must also attest that it accurately provided the required certification and complied with all the PPP loan requirements.

Companies still must maintain the relevant employment records for at least four years, and any other relevant records for at least three years. The SBA can request those records if they decide to conduct an audit of the PPP loan.

The Act provides that forgiven PPP loan funds are not treated as taxable income. Also, business expenses that companies pay for with PPP funds are deductible in accordance with traditional business expense deductibility rules. This was a dubious issue before, with businesses having questions about the taxability of PPP loan funds, but this is now one of the technical, if not substantial, corrections Congress made with the new relief legislation.

The Act targets the second draw loans at smaller and harder-hit businesses, with a maximum amount of $2 million. In order to receive a second draw PPP loan, eligible borrowers must meet three criteria:

• The company must have no more than 300 employees;
• They must have used or will use the full amount of their first PPP loan by the time the second draw loan is originated; and
• Demonstrate at least a 25 percent reduction in gross receipts in any quarter of 2020, compared to the same quarter in 2019. Any loan applications submitted after January 1, 2021 are eligible to use the gross receipts from the fourth quarter of 2020 for that comparison.

Eligible entities include businesses, certain non-profit organizations, self-employed individuals, sole proprietors, and independent contractors. Businesses or individuals in these categories, and who obtained a PPP loan, can all apply for a second draw PPP loan.

The SBA reopened the loan portal for the first PPP loans and the second draw loans on January 11, 2021. The SBA also published new rules to implement both loan programs, and provided the required PPP application forms for both the first draw and second draw loans. Now that those new rules and application forms are published, eligible borrowers that either never got a first loan, or received a first loan and meet the criteria for the second draw loan, are encouraged to review the guidance, and consult and apply with their lenders.

There is a calculation borrowers must complete to determine their loan amount, and the maximum amount a borrower can take on the second loan is $2 million. That amount and the criteria for the second draw loans is indicative of Congress and the Small Business Administration’s intent to target these second draw PPP loans to smaller companies that experienced more significant adverse impacts since the beginning of the pandemic.

One big difference is the maximum amount of the loans. For a first PPP loan the maximum loan amount is $10 million. This applies for eligible borrowers that did not obtain a PPP loan. There is a calculation borrowers must complete to determine their specific loan amounts, and that formula is outlined in the newly released guidance. For the second draw loan, the maximum loan amount is $2 million. 

Some of the eligibility rules are also different between the two loans. The first PPP loan is available to companies with 500 employees or less, which was the same rule under the CARES Act. The second draw loans are available to companies with less than 300 employees, and there are the other two criteria for second draw loans requiring that borrowers have used or will use the full amount of their first PPP loan by the time the second draw is originated, and the borrower must demonstrate a 25 percent reduction in gross revenues between the same fiscal quarters in 2019 and 2020. The two loan programs are largely similar regarding the forgiveness terms, including the 60 / 40 rule. That rule basically means that 60 percent of the PPP loan funds must be spent on qualified payroll costs, and the additional covered business expenses that are allowed to comprise the other 40 percent of loan funds.

The Act makes significant changes to the employee retention tax credit. First, it extends the tax credit into 2021, now running from January 1 to June 30. The new law also allows employers with up to 500 employees to claim the credit, where that threshold was previously capped at 100 employees. The new law also increases the amount of the employee retention credit to 70 percent of qualified wages. Under the former rules, employers only could claim the credit for up to 50 percent of an employee’s qualified wages; now, that maximum rate is 70 percent.

The new law also makes a large reduction in the decline of required gross receipts to qualify for the employee retention tax credit. Before the change, employer companies had to show they incurred a 50 percent decline in gross receipts; now, they only must show a 20 percent decline.

The Act also increases the limit on per-employee creditable wages for the employee retention tax credit from $10,000 a year, to $10,000 each quarter.

There is guidance on the IRS website that allows eligible employers to get immediate access to the employee retention tax credit by reducing employment tax deposits they are otherwise required to make. There is also a provision that if the employer’s employment tax deposits are not sufficient to cover the employee retention tax credit, the employer may get an advance payment from the IRS. This guidance refers to the remittances employers make for employment taxes throughout the year, and that benefit goes through June of 2021.

Employer companies cannot claim the credit for the same wages they paid with PPP funds. Although a company can receive a PPP and claim the employee retention tax credit, both provisions cannot be used for the same set of wages. For example, if May was part of a company’s covered period for a PPP loan, that company cannot also use the employee retention tax credit for wages that were paid in May.

Congress also renewed the authorization for Economic Injury Disaster Loans (EIDL) and doubled that program’s appropriation to $40 billion, from $20 billion. This program was also extended through Dec. 31, 2021. There’s also $20 billion for certain entities to receive the difference between $10,000 and the EIDL advance funds they received through EIDL grants under the CARES Act.

Eligible recipients would include those with 300 or fewer employees that are in low-income communities and that had economic losses of at least 30 percent over eight weeks compared with a similar period before the pandemic. The new law also repeals a provision from the CARES Act that requires PPP forgiveness amounts to be reduced based on EIDL advances. Under the CARES Act, if a PPP loan borrower also received an EIDL advance of $10,000, their PPP loan forgiveness amount would automatically be reduced by $10,000. The new relief law eliminated that requirement.

There are some other tax credits for companies, including an extension of the employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees pursuant to family and medical leave requirements. The credit is equal to 12.5 percent of eligible wages under certain conditions, and the maximum amount for any qualifying employee is 12 weeks per taxable year. The amendment made by this section of the new law applies to wages paid in taxable years beginning after December 31, 2020. Credits for paid sick and family leave under the Families First Coronavirus Response Act (FFCRA) were also extended in this new law until the end of March 2021. However,  employers are not required to permit paid leave under the FFCRA after December 31, 2020. The paid leave program through March 2021 is voluntary, but the credit extension is only available where the FFCRA is permitted by the employer.

There is also a variety of individual benefits:

• Federal pandemic unemployment compensation benefits will be extended for 10 weeks through mid-March, with each week supplemented by a $300 payment.
• Pandemic Unemployment Insurance benefits were extended.
• Temporary rules allowing individual taxpayers to use their earned income for the previous year, to determine the amount of their earned income tax credit and the child tax credit.

This was an overview of the aspects of the law that are the most relevant to small businesses and the promotional products industry. PPAI provided additional information about the law in a webinar that can be found on PPAI’s education website.

These frequently asked questions and response information do not constitute legal or tax advice. It is important to consult with an attorney or tax professional to determine the applicability of the law and enforcing regulations to your specific situations.