Thousands of Georgia companies benefited from last year’s first round of federally backed Paycheck Protection Program (PPP) loans, some collecting as much as $10 million with the prospect that all or most of it would be forgiven.
But as our firm quickly discovered, the program was imperfect. Large, publicly held companies appeared to get preferential treatment from their lenders, who were later sued for the practice. While no one knew what the full severity and effects of this pandemic would be, almost all borrowers feared their revenues would decline and profits and cash flow would evaporate, leading to difficult decisions: Do I take the PPP loan and keep my people employed, or do I furlough my employees and fear they may never return?
Credit: contributed
Credit: contributed
In spite of the economic boost from the PPP loan, many businesses that took these loans failed. Indeed, some of the hardest-hit companies, especially in the hospitality industry, found the process difficult to navigate and the loans – either because of the amount, timing or constantly changing rules – insufficient to keep them afloat.
At last, however, some of the hardest-hit industries now have a chance at survival due to the many improvements Congress built into the second round of PPP loans, which are now underway. Those companies truly hit hardest by the pandemic-fueled recession stand to benefit the most, both via the loans as well as new rules governing tax credits that reward employee retention.
Credit: contributed
Credit: contributed
Small businesses that missed securing a PPP loan during the first round now get a second chance, and these “first draw” loans are generally subject to the original program rules. “Second draw” PPP loans for repeat borrowers come with new eligibility requirements that make good policy sense. For starters, companies can have no more than 300 employees, compared to 500 in the first round of PPP. Businesses must also prove a reduction in gross receipts of 25% or more for any calendar quarter in 2020, compared to the same calendar quarter in 2019. The underwriting process also is far easier and less burdensome this time around.
To obtain a second draw loan, a company must have used the full amount of their first PPP loan by the time the second draw is disbursed. But be forewarned; the upcoming round of loans are for less money than the first go-round. Instead of the previous $10 million cap, individual borrowers can now receive only up to $2 million Businesses that are part of a single corporate group are capped at $4 million of aggregate loans, compared to $20 million previously.
Although borrowers generally can borrow up to 2.5 times their average monthly payroll, there is one new and significant exception: the hardest-hit hospitality companies may borrow up to 3.5 times their payroll. These companies include, but are not limited to accommodation and food service, recreational vehicle parks, caterers, bars, and some recreational vacation camps (except campgrounds).
Another improvement comes in the loan forgiveness process, which has been simplified for loans up to $150,000. Companies that receive these smaller PPP loans only need to provide a one-page certification with no documentation, including information reporting only the number of employees the borrower was able to retain, the estimated amount of the loan spent on payroll costs and the total loan amount.
Finally, thanks to Congress, businesses will not be hit by a tax bill when their loans are forgiven. Now taxpayers may both deduct the expenses paid with PPP loans and benefit from a basis increase when their loan is forgiven.
Aside from the PPP, there also have been several positive and prudent changes to the Employee Retention Credit (ERC), which is a refundable credit enacted as part of the CARES Act and designed to incentivize employers to retain employees and maintain salary through the pandemic. Congress expanded and extended the ERC through June 30 of this year, and the new rules make it easier for employers to qualify and provide bigger tax credits than previously. Most significantly, you may now claim an ERC and receive a PPP loan, though you may not use the payroll interchangeably.
The new rules greatly reduce the revenue reduction a company must demonstrate this year in order to qualify (now only a 20% decrease in revenue must be shown, versus 50% for 2020) and dramatically increases the size of a company – based on the number of employees – that can qualify for the credits by paying employees for the same work.
Much like the COVID-19 vaccine now making its way to Georgians, the extension of the PPP and ERC and the enhancements to these programs provide an important and much-needed second shot in the arm to Georgia companies, particularly those that have struggled the most to survive during the pandemic. Hopefully, these programs will supply the right medicine to restore the economic health of local companies.
Stephen Klein is a partner in Atlanta-based accounting firm Bennett Thrasher’s bankruptcy and restructuring practice and leads its PPP-related efforts. Tim Oberst, a partner in Bennett Thrasher’s tax practice, is responsible for coordinating income tax engagements for closely held corporations, partnerships, not-for-profit organizations and individuals.
About the Author
