COVID Relief Bill - PPP Updates

We recently interviewed Dan Brogdon, Horizon's resident PPP expert. On December 27, 2020 President Trump signed the latest COVID-relief act and government funding bill.

The legislation provides $900 billion in COVID-relief, including several programs to help farmers and agricultural businesses. The interview with Dan focused on the Paycheck Protection Program (PPP), including updates to the program and a second round of PPP that was part of the legislation.

There’s a lot included in the 5,593-page bill on COVID-relief. One of the biggest pieces of good news for the PPP program is the tax treatment of PPP expenses. Could you share with our listeners about that change and what it means for PPP borrowers?

Finally, Congress was able to set the record straight, and now we can deduct the expenses that you used your PPP loan funds for.

In November you might remember that IRS ruled the opposite. They essentially said, "Nope, you got tax-free money. You don't have to count it as income, but you cannot count the expenses." So, in effect, the proceeds were taxable.

The new act changed that, so that's great news. Now you can deduct the expenses and you do not have to include PPP forgiveness as income. If you received forgiveness or when you receive forgiveness, it won't be taxable.

Next, the legislation also simplifies the loan process for borrowers with PPP loans less than $150,000. Tell us more about that simplification.

For PPP borrowers with loans of $150,000 or less, when they apply for forgiveness, it will be a one-page application. The language says that has to be one page, so it shouldn’t be any longer than that. Also, borrowers will not have to submit any documentation.

I've heard some people refer to it as ‘automatic forgiveness’ for loans $150,000 or less. Well, it's not. You're attesting on that form that you used the funds appropriately, and you followed all the PPP rules, such as retaining employees and maintaining pay rates.

One thing that did survive with the new law is the safe harbors. Those safe harbors are cases where you had to reduce your staff due to being shut down, due to the government order. Or if you reduced your staff and then brought it back up to the previous level by a certain date, you won't be penalized on your forgiveness. Also included in that was, for the borrowers with loans of $50,000 or less, the FTE or salary reduction tests do not apply.

In summary, those with PPP loans of $150,000 or less will have to fill out a one-page application. They don't have to give the lender all the documentation they would have had to before. PPP borrowers are going to be very happy about that change, and Horizon is also happy that we don't have to review that paperwork.

The relief bill introduces a new “Draw 2” PPP loan. Dan, what does that Draw 2 loan entail, and who is eligible?

Anyone that received a Draw One PPP loan in 2020 is eligible to apply for a Draw Two PPP loan.

In order to be eligible, one of the big things is you must certify that due to the current economic conditions, funds are necessary to support your ongoing operations. That attestation is a key to your eligibility for the program.

The other big gatekeeper is that your gross income was reduced by 25% or greater in any calendar quarter of 2020, as compared to the comparable quarter of 2019. Or you could simply just look at the full year of 2020 versus the full year of 2019. The SBA already issued the rules and the procedures of the Draw Two program, and the application is available. As of today, only small community lenders are taking applications, but other institutions such as Farm Credit associations should have access to make Draw Two loans later this week or early next week.

So there you go, you have an opportunity for another PPP loan! If you are eligible, it will probably be a similar amount to your Draw One PPP loan because the formula is basically the same. The only exception is that you can choose to use either 2019 or 2020 payroll expenses when calculating your loan amount, if you qualify for Draw Two.

Again, the big key is the attestation that it's necessary to support ongoing operations. The other thing is the 25% drop in gross income comparing a quarter in 2020 to the comparable quarter in 2019.

There have been some changes that could impact borrowers of a Draw 1 PPP loan, for individuals that received a PPP loan last year. Could you help us understand who may have the opportunity to apply for an increase of their Draw 1 PPP loan?

This is another very exciting part of the new act! It only applies to those who received a Draw One PPP loan and have not yet received forgiveness, and if the borrower fits any of the rule changes that I outline. If you already received forgiveness, you would not be eligible.

The situations for potential Draw 1 increase include:

1. Sole proprietors only (partnerships and corporations don’t qualify): If you filed as a sole proprietor, you can use your 2019 gross Schedule F income instead of your net Schedule F income to calculate your eligible PPP loan amount. What this means is that farmers filing a Schedule F, sole proprietors could be eligible for a PPP loan increase of up to $20,833. Before you only qualified if you had a profit on your Schedule F. Now, if you had a net loss, you could qualify for that full $20,833, provided you have at least $100,000 of gross income. So you can have less than $100,000 of gross income and still qualify for an increase, but that's the maximum amount when we're looking at the calculation.

Another thing to add, anyone that has not received a Draw One PPP loan because they weren't eligible before, could now apply for a Draw One PPP loan. If you know of anybody that's in the circumstance that they didn't qualify because they didn't have a profit on their Schedule F to be able to qualify for a PPP loan, now they can apply and get their first PPP loan because of this gross income ruling. This is big and we'll be talking more about this, I'm sure.

2. Partnerships: Another situation where existing PPP borrowers can apply for an increase, if they haven't received forgiveness already, is partnerships. If you didn't include your K-1 net earnings from self-employment when you calculated your Draw One PPP loan, you can now include that and apply for an increase.
3. Seasonal employers: The third situation is seasonal employers. Make sure you qualify for the seasonal employer definition that has been released by SBA. You might be a seasonal employer if you have cyclical income or cyclical periods where you hire labor. You can choose from any 12-week period between February 15, 2019 and February 15, 2020 to calculate your maximum PPP loan amount. If that calculation yields a better result than what you had attained with your original PPP loan, you can apply for an increase.
4. New eligible payroll expenses: The fourth situation is all borrowers may include the payments they make towards employee fringe benefits, such as group life, dental, disability and vision. They can include those in the payroll expense and get it increased in their Draw One PPP loan. Originally the fringe benefits that were included were only retirement and health insurance, it was what the employer paid for the employee. Employer owners like sole proprietors, their health insurance and these fringe benefits don't count towards the PPP calculation. (Updated information: These new eligible payroll expenses won't alone qualify a borrower for a First Draw PPP loan increase. However, if the borrower qualifies based on other factors, they can take these new eligible payroll expenses into account).
5. Restaurants: The fifth reason for an increase is if you are a restaurant. You can apply for an increase if you did not include tips as wages when you calculated your original PPP loan.
6. You paid off your PPP loan prior to forgiveness: The sixth and final reason where you may qualify for an increase is if you paid off your PPP loan or you reduced the amount that you would have been eligible for, if you'd returned part of your PPP loan, you can now apply to get that reinstated. Either receive an increase or just a re-advance of that loan. The reason that they did that is there was a lot of confusion around about the necessity test and the safe harbor. SBA finally released that they weren't going to test loans under $2 million for that economic necessity test.

Those are the reasons that you can apply for an increase. We don't know what the process is, nor has the application for an increase been released. We'll be keeping our customers informed as to when they can apply for an increase. We do know that the deadline to apply for a PPP loan, a new Draw One, Draw Two, or an increase, is March 31, 2021. That's a lot to cover, but we'll be summarizing this on our website so you can review it there as well.

I understand there were some updates on the Economic Injury Disaster Loan (EIDL) program and also how EIDL interacts with PPP. Could you share with us those EIDL updates?

Another big change for the better is for anyone who received a EIDL loan advance. The advance was the initial amount up to $10,000. SBA had calculated that as $1,000 per employee, up to $10,000 maximum. The old rules had that reducing your PPP forgiveness. It was so that you couldn’t double dip. If you're were going to get your PPP loan forgiven and you got a $10,000 EIDL advance, SBA originally said they would reduce your forgiveness by $10,000.

The new act got rid of that reduction, so you're going to get your full PPP forgiveness that you're eligible for, and the EIDL advance will not impact your PPP forgiveness. So there's an extra up to $10,000 for folks that received EIDL advance, and they won't have to pay it back. The advance was never intended to be paid back, it's considered to be a grant.

The other thing is, SBA was applying that formula of $1,000 per employee up to $10,000. Well, Congress didn't like that. They thought everybody should have been treated equally, whether you're a big business or a small business. So the new act has SBA to digging back into the funds that they've appropriated for the program. If you received less than $10,000 for your EIDL advance, or you didn't get an advance when you have a loan or if you applied for a loan, you're going to get the difference between your original advance from that $10,000.

Again, there's been nothing released yet. Horizon does not administer EIDL loans. But if you did receive EIDL funds, we encourage you to check in with SBA.

The final thing I'm going to say about EIDL, is there is now a round two of EIDL. It has the provision for the advance, but the program is focused in on highly impacted businesses in low-income areas. There's about $20 billion allocated to this program, which, from what I've heard from other experts, they think that's going to be used up pretty quickly. It's going to be difficult to qualify, because businesses need to show a 30% gross revenue reduction from 2020, versus 2019. The test period is any eight-week period. For 2020 compared to a comparable eight-week period in 2019, you would need to show your revenue reduced by at least 30%.

The EIDL attestation, as far as economic necessity, is at a higher level from what I understand, as compared to the PPP program. You need attest that you essentially need this money to stay in business.

When it comes to the economic necessity attestation, whether it's PPP or EIDL, lenders can't really encourage or discourage anybody to apply. Or if you're going to go to SBA for an EIDL loan, the answer to that question is case-by-case. It's up to you, because we're not going to be evaluating that. You're the one that's answering that question and putting your integrity on the line.

If you're uncertain as to how to answer that question, we advise you to talk to your tax advisor, attorney or other financial consultants.

This is a lot to take in, but certainly some good opportunity for farmers and agricultural businesses to receive additional relief. What’s your recommended strategy on how existing PPP borrowers should approach these changes?

The big thing is, first determine whether you qualify for a Draw One increase before you look to apply for loan forgiveness. Information will be released within the next few weeks with the procedure on how to apply for your increase.

Once you've applied for that increase and received the increase, then I'd encourage you look at applying for forgiveness of your loan, using the $150,000 or less simplified forms. Or if you're above $150,000, you’ll follow that process which will be similar to what was previously in place. They've reduced some of the documentation retention requirements, but they might revise the form a little bit to account for the addition of the new fringe benefits that are allowed to be included in the PPP forgiveness calculation.

Again, to summarize: if you are an existing PPP borrower, first determine whether you qualify for PPP Draw One increase. Apply for that increase, attain that increase and then look to apply for forgiveness. You have until March 31 to apply for the increase. Then you have up to 10 months from the end of your cover period to apply for forgiveness.

Just as a reminder, your forgiveness covered period was up to 24 weeks from the day you received your PPP loan. Your covered period, always, always, always began on the day you received your PPP loan or the day that Horizon wired the money to you. The covered period ended between eight and 24 weeks from that date. So your deadline is 10 months from the end of that covered period.