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Perspectives

Payroll Protection Program is Revived, Expands to Coops

In the recently enacted federal stimulus bill, Congress has revived the Payroll Protection Program (PPP). This program provides forgivable loans to businesses whose revenues have suffered as a result of the pandemic, for the purpose of allowing them to sustain their operations and retain their employees.

The PPP program is being reopened to new loan applications. An eligible business or non-profit entity may borrow up to 2.5 times its average monthly payroll (3.5 times its average monthly payroll for the restaurant and hospitality industries). The loan will be forgiven if the borrower spends the proceeds on eligible expenses including payroll, rent, utilities, and certain measures to mitigate the coronavirus spread. For full forgiveness, at least 60% of the loan proceeds must be used for payroll and the borrower may not lay off any employees. A borrower must certify that the loan is necessary to maintain operations and meet other eligibility requirements.

Certain borrowers who took a PPP loan in 2020 may be eligible to take a second PPP loan in 2021. To be eligible for a “second draw” loan, a borrower must have suffered a 25% reduction in its revenues between any calendar quarter of 2019 and the corresponding quarter of 2020. The maximum loan for a second draw is $2 million. Public companies and companies with more than 300 employees are not eligible.

During the 2020 loan program, it was uncertain whether housing cooperatives were eligible to participate in the PPP. The new legislation specifically provides that cooperatives are eligible for PPP loans. Unfortunately, there is still no mention of unincorporated condominiums or homeowners associations.

The new law requires the Small Business Administration (SBA) to issue regulations governing the new round of loans. These should be published during the first week of 2021 and will provide additional clarity regarding how the new round of PPP loans will be administered. The law also requires the SBA to simplify the process for smaller borrowers to have their loans forgiven. However, potential borrowers should be aware that based on recent court rulings, the names of all borrowers and the amounts borrowed are public information that is available online and may become the basis for press coverage.

Another important provision of the new law confirms the federal tax deductibility of expenses paid with a forgiven PPP loan. In the original PPP legislation, Congress directed that forgiveness of a PPP loan shall not constitute taxable income. However, the Internal Revenue Service issued a ruling that expenses paid with the forgiven loan monies would not be deductible from gross income, which would have negated the favorable tax treatment that Congress directed. The new legislation overrules the IRS position and restates that a forgiven PPP loan does not give rise to taxable income and that expenses paid with the loan monies are fully deductible.

Potential borrowers under the PPP program, including cooperatives, should consult with their counsel, accountants, and potential lenders regarding their eligibility and the requirements for applying for a loan.