One of the largest components of the now-signed second stimulus bill is $284 billion to support small business through a rebooted and revised Paycheck Protection Program (PPP) lending program that will tighten qualification requirements but loosen taxation and eligible expense rules.
The so-called “Second Draw” PPP will be limited to companies with fewer than 300 employees, down from 500 in round one, who can show at least a 25 percent drop in revenue for any one quarter this year versus what they did in 2019.
Assuming a business meets those requirements, loans will now be capped at $2 million — down from $10 million in round one — or 2.5 months of payroll, except for hotels and restaurants, which can apply for 3.5 times their average monthly payroll. The new loans will also be available to qualifying non-profit and churches.
Other carve-outs in the new PPP package include a ban on publicly traded companies from receiving loans, as well as $50 million earmarked for audits by the Small Business Administration, which will again oversee the process, although the loans will actually be made through commercial banks.
Spending Rules
Given that it is called the Paycheck Protection Program and that loans are capped at 2.5 times monthly payroll, it is implied that the proceeds of this particular economic stimulus component are designed to prevent layoffs and flow through to employee wages. However, the new bill requires that 60 percent of any money borrowed go to wages.
While the first round of PPP was largely limited for use on payroll and business rent, PPP2 allows for money to be used for other business expenses such as supplies and personal protective equipment, as well as to repair any property damage “due to public disturbances.” It also allows companies to use the proceeds to pay for software and cloud computing services and accounting costs.
Compliance with these rules is likely since the loans are only tax-free and forgiven if the proceeds are spent as intended.
Tax Breaks
As it stands, the loans to small businesses are already tax exempt, but the 5,600 page spending bill also includes a new deductibility clause that would allow businesses to write off expenses paid for with stimulus money.
Although the first round of PPP saw numerous examples of abuse and fraud, tax experts said a big part of that problem was due to the speed and urgency that loans were applied for and disseminated. Treasury Secretary Steve Mnuchin had tried to block this “double-dip” benefit, which is expected to cost the government hundreds of billions of dollars of additional expense on top of the PPP program itself due to lost tax receipts.
The new bill also creates a simple one-page forgiveness sheet for loans up to $150,000 to help streamline the process for the smallest companies.
From Bill To Bank Account
In total, 5.2 million businesses applied for PPP the first time the bailout program was passed nine months ago. But with less total money available and tighter payroll and headcount limits in place, it is presumed that PPP2 will only provide a few months of relief.
One of the remaining variables will be how quickly the SBA and participating banks can actually begin to process new applications, as well as repeat applications by second draw borrowers. Either way, whether it’s direct payments to individuals or PPP loans to businesses, the stop-gap stimulus spending is designed to bide time until the COVID vaccine can be widely deployed and the economy can stabilize.
And with a new administration set to begin overseeing the process in less than four weeks, the possibility of another round of stimulus, including PPP3, cannot be ruled out.
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