Small Businesses and Small Lenders to Star in PPP, Round 3

Passed by Congress on Dec. 21, 2020, the Economic Aid to Hard-Hit Small Businesses and Nonprofits and Venues Act, a part of the Continuing Appropriations Act, 2021, covers the incremental $284 billion allocated out of the $900 billion COVID-19 aid package for small businesses.

The focus of this third round of the Paycheck Protection Program is smaller businesses. There will also be a push to get smaller community-based lenders to lead the program. As community-based financial institutions, credit unions should be well positioned to provide these loans to the primary targeted small businesses.

The general parameters call for eligible firms to have 300 or fewer employees and the maximum loan amount that will be considered will be $2 million. This is down from 500 or fewer employees and a maximum loan size of $10 million. The Small Business Administration will be coming out with specific guidance in early January, but it looks like the real focus will be on businesses that have 10 or fewer employees. 

The dollar amount of the loan will still link to a calculation of 2.5 times the average monthly payroll up to a maximum of $2 million. Borrowers that took part in the prior rounds are eligible to apply if they meet the quarterly drop in sales volume test.

One of the key eligibility tests involves comparing quarterly sales volume generated in 2019 against the same quarter for 2020. If any of the first three (3) calendar quarters reflect 2020 sales volume down by 25% from the same quarter numbers for 2019, the business is eligible to apply. The forgiveness component of the program will allow the borrower to use the loan proceeds for a wider array of operating expenses that will be eligible for forgiveness. For example, any expenses incurred due to business property damage caused during a public demonstration that occurred in 2020 will be eligible for forgiveness.

In the first two rounds of PPP, a total of $525 billion was given to 5.2 million borrowers. About 87% of the borrowers (4.5 million) borrowed on average less than $150,000, which turned out to be about 28% of the total loan pool. Approximately 13% of borrowers in the first round combined to borrow $378 billion or approximately 72% of the total loans granted. The overall average loan size in this group was over $750,000.

A concern has come up regarding the Internal Revenue Service and its comments about debt forgiveness being taxable income under the current tax law. This tax issue is yet another thing that fell through the cracks when SBA created the original guidance for the Economic Injury Disaster Loans and PPP loan programs.

The EIDL disaster relief program came about first and was originally designed as an economic relief grant program. It was a government economic stimulus program that, by definition, would not create a taxable event for whoever received the grant. 

Then SBA said that if a business had already had an EIDL grant when it applied for and received a PPP loan, any amount that received from the previous EIDL grant would have to be deducted from your PPP loan forgiveness calculations. Following this logic meant that the EIDL loan was not a stimulus grant. 

Then, to really muddy the water and create even more confusion, the IRS stepped in and said that any amount of the PPP loans taken that was forgiven would turn into taxable income for the borrower. The agency also said that businesses could not deduct any expenses covered by PPP loan proceeds on their business entity tax returns because that was “double-dipping.”

The new bill just passed this week is supposed to clarify the IRS confusion. The forgiven amount for a PPP loan is not going to be treated as taxable income for the business. The business operating expenses covered with PPP loan proceeds will still be operating expenses that are tax-deductible for the business.

The third round of PPP funding is supposed to be treated as incremental loan proceeds. The forgiveness calculations do not have to look back at prior PPP loan or EIDL grant proceeds received by the borrower for any amounts that need to be netted out of the eligible forgiveness amount. The forgiveness application process for the third round is supposed to be focused solely on the use of the loan proceeds. If the proceeds are used for eligible expenses, those amounts will all be forgivable. 

It will be interesting to see how many small businesses will participate in the third round, given all the hassles they have encountered with forgiveness in the first two rounds as well as the confusion they encountered with the IRS’ tax law interpretations. It is too bad that all the confusion about eligibility and forgiveness amounts is making small business owners afraid to tap into the program to get needed financial help that is critical to enabling them to stay afloat.

As community-based financial institutions, credit unions should be in a position to provide these loans to the primary targeted small businesses.

Jim Devine is CEO of Hipereon Inc., Kirkland, Washington, and a faculty member for our School of Business Lending™ hosted by CUES.